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2022 (2) TMI 1186 - AT - Income TaxTP Adjustment - International transaction under consideration is 'Receipt of commission' from sale of products of its AEs in India - Other method applied as MAM - TPO adopted 'other method' under Rule 10AB for determining the ALP of this international transaction - HELD THAT - TPO ought to have considered Material cost and Depreciation contributing to the generation of income from manufacturing activity in the same way as he considered the Manufacturing and Marketing costs. If all the four costs are considered as generating the overall profit from the Manufacturing segment of the assessee, then the percentage of Marketing profit to sales comes to 0.59% as against 2.55% computed by the TPO, as has been depicted. When such percentage of Marketing profit to sales is applied to the sale value of the products of the AEs sold in India through the assessee's endeavour, then the amount of profit pertaining to Marketing effort comes to ₹ 3.14 crore. If the expenses incurred by the assessee on sale of the AEs products at ₹ 39.24 crore are added, the resultant gross amount which should have been received by the assessee as commission comes to ₹ 42.38 crore. As against that, the assessee actually received Commission income of ₹ 44.30 crore, which is explicitly at ALP. We, therefore, approve the conclusion of the Ld. CIT(A) in deleting the addition TPO applied other method' as the most appropriate method for determining the ALP of the international transaction, which method came into vogue, as per Rule 10AB, only from the A.Y. 2012-13 under consideration and the assessee has not objected to the application of this method. This method obviously could not have been nor has actually been applied by the assessee or the TPO in any of the earlier years. There can be no denial that different amounts of the ALP emerge under different methods. Secondly, for the earlier years, the amount of Sale considered by the Revenue for determining the ALP consisted of sale of manufactured goods; sale of traded goods and commission. Au contraire, the amount of sale at ₹ 2075.81 crore considered in the entire exercise for the year under consideration is only of manufactured goods and has no components of traded goods or commission. In that view of the matter, the findings given by the Tribunal for such earlier years do not per se apply to the year under consideration. However, in view of our discussion made above pointing out infirmities in the TPO's ALP determination, we hold that the transfer pricing addition under other method' as per rule 10AB was not justified, which has been rightly deleted in the first appeal. Deduction towards Education Cess - HELD THAT - It is seen as an admitted position that the Tribunal in the assessee's own case for earlier years has allowed such additional ground by relying on the judgment of Hon'ble jurisdictional High Court in Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT - However, it is pertinent to note that the Finance Bill, 2022 has proposed an amendment to section 40(a)(ii) by insertion of Explanation 3 w.e.f. 01-04-2005 as clarified that for the purposes of this sub-clause, the term 'tax' shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. For proposed amendment, it is manifest that the legislature has proposed to neutralize the effect of the above referred judgments granting deducting towards Education Cess. As the proposal mooted through the Finance Bill, 2022 is likely to be passed shortly, the deduction which was otherwise eligible and granted in earlier years, would become non-eligible retrospectively with effect from the assessment year 2005-06. Allowing such deduction now and then shortly thereafter recalling the order in the light of the Finance Act, 2022 will be an exercise in futility. We are thus not inclined to grant such deduction. The ld. AR fairly accepted the position. However, a liberty is given to the assessee to move rectification application in case the proposed amendment in the Finance Bill is either not enacted or enacted prospectively so as to align our decision with the resultant modification. This additional ground is, therefore, not allowed in the above terms. Claim of depreciation on the expenditure of premises - AR submitted that consequent to the decision of the Tribunal for the assessment year 2004-05 in relation to disallowance of expenditure on premises to the extent of 40% of such expenses being held as capital in nature, the assessee deserves to get the consequential depreciation on the same - HELD THAT - We deem it proper to remit the matter to the file of the AO for carrying out necessary verification in this regard and then decide the issue accordingly. To clarify, if the AO, after capitalizing 80% of repairs cost for the assessment year 2004-05, continued with the enhanced value of block in the subsequent years as well, then the amount of depreciation on the excess 40%, as the capitalization reduced by the CIT(A) , should be disallowed. If, on the other hand, the AO had not increased the value of block of assets in succeeding years by 80% of capitalization done by him for the assessment year 2004-05, then further depreciation should be allowed on 40% of the capitalization as upheld by the Tribunal in its order for the assessment year 2004-05. Needless to say, the assessee will be allowed reasonable opportunity of hearing to the assessee Additional ground of consequential claim of depreciation on the expenditure of software - HELD THAT - We find that the additional ground of the assessee cannot survive if the AO, after capitalizing the software expenditure for the assessment year 2007-08, continued with the enhanced value of block of assets for the purpose of depreciation in succeeding years. It is only if the enhancement in the value of block of such assets made for the assessment year 2007-08 was not carried out in the later assessment years that the additional ground of the assessee would get accepted. The AO is directed to carry out necessary verification of this issue in the same way as directed for the second additional ground and then pass the order. Addition u/s.14A - HELD THAT - The first component of disallowance is of interest expenditure treated as relatable to investments which yielded exempt income. Our attention has been drawn towards the fact that as against such investments amounting to ₹ 32.00 crore, the assessee had share capital of ₹ 22.56 crore and Reserves and Surplus at ₹ 802.78 crore. Thus, it can be seen that the shareholders fund of the company is far in excess of the investment yielding exempt income. Hon'ble Dehi High Court in CIT vs. Tin Box Company 2002 (11) TMI 75 - DELHI HIGH COURT holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. More recently, the Hon'ble Supreme Court in CIT(LTU) VS. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT has reiterated the same view. When we examine the amount of Investments at ₹ 32.00 crore as against the availability of Share Capital and Reserves at ₹ 802.78 crore, it becomes evident that the amount of such Investments is much less than the amount of Shareholders' fund. We, therefore, order to delete the first component of disallowance on account of interest amounting to ₹ 8,61,647/-. Second component of disallowance towards administrative expenses, which was computed by applying 0.50% of the average value of the investments in terms of Rule 8D(2)(iii). Such disallowance made and sustained in the first appeal is strictly in conformity with the said rule and, therefore, does not require any interference. We, therefore, sustain the addition at ₹ 8.00 lakh as against ₹ 16.71 lakh made by the AO and approved in the first appeal. Assessee appeal partly allowed.
Issues Involved:
1. Deletion of transfer pricing adjustment for "Receipt of Commission". 2. Claim for Education Cess as a tax-deductible expense. 3. Consequential claim of Depreciation on the expenditure of premises. 4. Consequential claim of Depreciation on the expenditure of software. 5. Transfer pricing adjustment on the difference in price of products sold to AEs and non-AEs. 6. Confirmation of Miscellaneous expenses. 7. Disallowance under section 14A of the Act. Detailed Analysis: 1. Deletion of Transfer Pricing Adjustment for "Receipt of Commission": The Revenue challenged the deletion of a transfer pricing adjustment of ?8.52 crore made by the Assessing Officer (AO) concerning the international transaction of "Receipt of Commission". The Transfer Pricing Officer (TPO) rejected the Transactional Net Margin Method (TNMM) applied by the assessee and instead used the 'other method' under Rule 10AB. The TPO calculated the Arm's Length commission revenue at ?52.82 crore, while the assessee received ?44.30 crore, leading to the proposed adjustment. The CIT(A) deleted the addition without discussing the merits, relying on earlier years' orders. The Tribunal found flaws in the TPO's approach, particularly in ignoring material costs and depreciation, which are crucial in generating manufacturing profits. The Tribunal upheld the CIT(A)'s deletion of the adjustment, concluding that the commission received by the assessee was at Arm's Length Price (ALP). 2. Claim for Education Cess as a Tax-Deductible Expense: The assessee claimed that the liability for education cess should be allowed as a tax-deductible expense. The Tribunal noted that previous decisions, including those by the Hon'ble jurisdictional High Court and the Hon'ble Rajasthan High Court, supported this claim. However, the Finance Bill, 2022, proposed an amendment to section 40(a)(ii), clarifying that 'tax' includes any surcharge or cess, thus negating the claim. Given the impending legislative change, the Tribunal did not allow the deduction but granted the assessee the liberty to file a rectification application if the amendment is not enacted or is applied prospectively. 3. Consequential Claim of Depreciation on the Expenditure of Premises: The assessee sought depreciation on the expenditure of premises, following the Tribunal's decision for earlier years that categorized part of the expenditure as capital in nature. The Tribunal remitted the matter to the AO for verification. If the AO had not increased the block of assets' value in subsequent years by the capitalized amount, further depreciation should be allowed. 4. Consequential Claim of Depreciation on the Expenditure of Software: The assessee requested depreciation on software expenditure disallowed in earlier years. The Tribunal directed the AO to verify if the enhanced value of the block of assets was carried forward in subsequent years. If not, the additional ground would be accepted. 5. Transfer Pricing Adjustment on the Difference in Price of Products Sold to AEs and Non-AEs: The AO made a transfer pricing adjustment of ?71.00 lakh, applying the Comparable Uncontrolled Price (CUP) method. The Tribunal noted that similar issues were sent for fresh determination in earlier years and remitted the matter to the AO/TPO for re-evaluation in line with previous directions. 6. Confirmation of Miscellaneous Expenses: The assessee did not press this ground, and the Tribunal dismissed it. 7. Disallowance Under Section 14A of the Act: The AO disallowed ?16,71,647/- under section 14A, comprising interest and administrative expenses. The Tribunal found that the assessee had sufficient interest-free funds, thus deleting the interest component of ?8,61,647/-. However, the administrative expenses disallowance of ?8.00 lakh was upheld as per Rule 8D(2)(iii). Conclusion: The appeal of the Revenue was dismissed, and the assessee's appeal was partly allowed. The Tribunal's order was pronounced on 18th February 2022.
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