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2019 (7) TMI 660 - AT - Income TaxNature of expenditure - revenue or capital expenditure - remuneration paid for the installation and commissioning new brazing furnace and implementation of new technology - HELD THAT - We observe that it is an undisputed fact that the services of expat technicians were utilized by the assessee and that was for installation of new equipments. This amount is therefore part of the capital of the assessee and has to be taken to the Balance Sheet and it cannot be part of the Profit Loss account either as operating or non operating expenditure. We therefore set aside the impugned order and direct the AO/TPO to re-compute the operating profit by excluding such expenditure from the overall expenses. Hence additional ground No.2 of appeal of the assessee is allowed for statistical purposes. Disallowance of good work reward - amount paid to the senior level employees under Management Incentive Bonus Plan (MIBP) - addition made u/s 43B r.w.s.36(1)(ii) considering bonus - HELD THAT - Observation of the Revenue Authorities is incorrect since the facts on records clearly demonstrates that the issue of bonus as well as issue of MIBP are in altogether different terms and conditions. The judgment of SHRIRAM PISTONS AND RINGS LTD. VERSUS CIT 2008 (4) TMI 273 - DELHI HIGH COURT has referred to the Good Work Reward and it has been clearly held that it does not constitute bonus within meaning of section 36(1)(ii) and was allowable as normal business expenditure u/s.37. We therefore set aside the order of the Ld. CIT(Appeals) on this issue and held that the MIBP paid to the employees are not bonus in the hands of the employees and the said amount is allowable for deduction u/s.37(1) by the assessee. Thus this ground of appeal of the assessee is allowed. Disallowance of provision for warranty - trading liability incurred by the assessee in respect of the products sold by it to the customers in the ordinary course of its business - HELD THAT - As decided in assessee s own case 2017 (4) TMI 1261 - ITAT PUNE wherein as directed to the AO to allow the claim of the assessee vis- -vis provision for warranty. TP adjustment - direction of CIT(Appeals) in restricting TP adjustment if any to the value of international transactions and not to the total turnover of the assessee - As decided in assessee s own case 2017 (4) TMI 1261 - ITAT PUNE and 2013 (5) TMI 891 - ITAT PUNE the said issue is squarely covered by the decision of Hon ble Bombay High Court in Commissioner of Income Tax Vs. ALSTOM Projects India Limited 2016 (12) TMI 1408 - BOMBAY HIGH COURT wherein held that in the absence of segmental accounts TP adjustment have to be restricted only to transactions with Associated Enterprises on proportionate basis. Transfer pricing adjustment of Product Development and testing - doubt regarding the receipt of service - HELD THAT - The facts further demonstrated that for yearlier year the Co-ordinate Bench of the Tribunal(supra) has restored the issue to the file of AO for verification of nature of the expenses debited by the assessee. Taking totality of facts and circumstances into consideration and in view of the fact that there is difference of observation on facts by the Ld. TPO as well as the CIT(A) we set aside the order of the Ld. CIT(A) on this issue and restore the issue back to the file of the AO/ TPO to verify the nature of expenses. Thus ground No.2 of the Revenue s appeal is allowed for statistical purposes. Exclusion of foreign currency losses from operating expenses - applicability of Safe Harbour Rules issued by the CBDT dated 18.09.2013 - ssessee has been consistently treating foreign exchange fluctuation as operating in nature - HELD THAT - The Co-ordinate Bench of the Tribunal has referred the judgment in Pr. CIT Vs. Ameriprise India Private Limited 2016 (3) TMI 1272 - DELHI HIGH COURT and the judgment Pr. CIT Vs. B.C Management Services Pvt. Ltd. . 2017 (12) TMI 255 - DELHI HIGH COURT wherein it has been held that foreign exchange fluctuation in relation to trading transactions prior to Safe Harbour Rules from 2013 is operating gain or loss. Thus in view of the foregoing discussion we are of the opinion that the amount of foreign exchange gain/loss arising out of business/trading transactions is required to be considered as an item of operating revenue/cost. Thus the ground No.3 raised in appeal by the Revenue is allowed PLI calculation - compensation income is operating income or not - one off transaction which had not occurred in any of other assessment years - HELD THAT - CIT-A has correctly observed that compensation income of 2.65 Cr. has arisen during regular conduct of business. Without operation of the business the assessee would not have earned this income. This income cannot be considered to be one time income to justify its exclusion on the ground of extraordinary income. Therefore the Ld. CIT(A) has rightly directed to the AO to include this compensation income for computing PLI being operating income. Thus we are of the considered view that the order of the Ld. CIT(A) is fair and reasonable and it does not call for any interference and relief provided to the assessee is hereby sustained. Accordingly ground No.4 raised in appeal by the Revenue is dismissed. Addition on account of payment of retention bonus - HELD THAT - Assessee submitted that the person namely Mr. Sunil Kaul is the Manager of the assessee s company and he is not holding any share of the company and he is working for the company and the amount paid is in the nature of reward given to the employee for working in a company for a longer duration and it is absolutely contractual payment. That even these facts are mentioned in the order of CIT (Appeals). DR could not bring any evidences or material on record to controvert these facts. We do not find any infirmity with the findings of CIT(Appeals) and the relief provided to the assessee is therefore sustained. Thus ground No.5 raised in appeal by the Revenue is dismissed.
Issues Involved:
1. Exclusion of extraordinary expenditure on expats remuneration from operating expenses. 2. Disallowance of good work reward under Management Incentive Bonus Plan (MIBP). 3. Disallowance of provision for warranty. 4. Restriction of transfer pricing adjustment to the value of international transactions. 5. Transfer pricing adjustment of Product Development and testing. 6. Exclusion of foreign currency losses from operating expenses. 7. Treatment of compensation income as operating income. 8. Deletion of addition on account of payment of retention bonus. Issue-wise Detailed Analysis: 1. Exclusion of Extraordinary Expenditure on Expats Remuneration: The assessee argued that the additional salary cost of expat technicians for installing new equipment should be excluded from operating expenses. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the Assessing Officer's (AO) decision, treating it as operating expenditure. However, the Tribunal observed that this expenditure should be treated as capital expenditure and directed the AO/TPO to re-compute the operating profit by excluding such expenditure from the overall expenses. Thus, the additional ground of appeal by the assessee was allowed for statistical purposes. 2. Disallowance of Good Work Reward under MIBP: The Revenue disallowed the Management Incentive Bonus Plan (MIBP) payments, treating them as bonuses under Section 43B r.w.s.36(1)(ii) of the Income Tax Act. The assessee argued that MIBP payments were performance-based and separate from regular bonuses. The Tribunal agreed, citing the Delhi High Court's decision in Shriram Pistons & Rings Ltd., which held that such rewards do not constitute bonuses under Section 36(1)(ii) and are allowable as business expenditure under Section 37. Thus, this ground of appeal by the assessee was allowed. 3. Disallowance of Provision for Warranty: The issue of disallowance of provision for warranty was covered by previous decisions in the assessee's favor. The Tribunal noted that the provision was made on a scientific basis and consistently followed by the assessee. Citing the Supreme Court's decision in Rotork Controls India P. Ltd. and previous Tribunal decisions, the Tribunal allowed this ground of appeal by the assessee. 4. Restriction of Transfer Pricing Adjustment to the Value of International Transactions: The Tribunal upheld the CIT(A)'s direction to restrict transfer pricing adjustments to the value of international transactions, not the total turnover. This decision was based on the Bombay High Court's ruling in Commissioner of Income Tax Vs. ALSTOM Projects India Limited, which was also followed in the assessee's own case in previous years. Thus, this ground of the Revenue’s appeal was dismissed. 5. Transfer Pricing Adjustment of Product Development and Testing: The TPO doubted the receipt of services for which the assessee paid towards product development and testing. The CIT(A) did not doubt the receipt of services but noted the lack of evidence. The Tribunal found a contrast in the findings of the TPO and CIT(A) and restored the issue to the AO/TPO for verification of the nature of expenses and adjudication after providing a hearing to the assessee. Thus, this ground of the Revenue’s appeal was allowed for statistical purposes. 6. Exclusion of Foreign Currency Losses from Operating Expenses: The CIT(A) treated certain foreign currency losses as non-operating, while others were considered operating expenses. The Tribunal agreed that finance charges, including bank charges, should be excluded from operating expenses. The Tribunal remitted the issue of discount on forward foreign currency contracts to the AO for verification. The Tribunal also held that foreign exchange gain/loss arising from trading transactions should be considered as operating revenue/cost, following the Delhi High Court's decision in Pr. CIT Vs. B.C Management Services Pvt. Ltd. Thus, the ground of the Revenue’s appeal regarding foreign currency gain/loss was allowed. 7. Treatment of Compensation Income as Operating Income: The CIT(A) included compensation income received for cancellation of product development orders as operating income. The Tribunal agreed, noting that this income arose during the regular conduct of business and was not a one-time extraordinary income. Thus, this ground of the Revenue’s appeal was dismissed. 8. Deletion of Addition on Account of Payment of Retention Bonus: The assessee paid a retention bonus to an employee, which the AO treated as capital expenditure. The CIT(A) allowed the payment as revenue expenditure, noting it was a contractual payment for long-term service. The Tribunal upheld this decision, finding no evidence to counter the facts presented by the assessee. Thus, this ground of the Revenue’s appeal was dismissed. Conclusion: The appeal of the assessee was partly allowed for statistical purposes, and the appeal of the Revenue was partly allowed for statistical purposes. The Tribunal's decisions were based on detailed analysis of the facts, legal precedents, and the nature of the expenses involved.
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