9911796707
TMI Blog2014 (11) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... proof and evidences in support of the repairs and replacement of furnace - the natural justice demands to provide an opportunity to this assessee to furnish full details along with bills and vouchers to demonstrate the nature of expenditure incurred, before the AO, so that after proper investigation about the nature of expenditure can be determined – thus, the matter is remitted back to the AO for fresh consideration – Decided in favour of assessee. Treatment of software expenses – capital expenses or not – Held that:- The fact of incurring of expenditure for SAP on account of user licencee fee and on account of reimbursement is not in dispute – in CIT vs. Asahi India Safety Glass Ltd. [2011 (11) TMI 2 - DELHI HIGH COURT] it has been concluded that the expenditure incurred by assessee on software is allowable as Revenue expenditure more so as the expenditure acquired by the assessee was an application software which enable it execute tasks in the field of accounting, purchases and inventory maintenance – also in IBM India Ltd. vs. ACIT [2006 (3) TMI 196 - ITAT BANGALORE-B] the same is held that the expenditure on purchase of application software is allowable as revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be “uncontrolled Transaction”, meaning thereby that it has to be a transaction between two parties who are not related to each other. SKF transaction is not eligible to be treated as CUP as it is with related party - The another contention of the assessee is that the TPO and CIT(A) has relied upon the rates of royalty paid by the assessee during the earlier years - this transaction is also with related parties as it is given to a related party of the assessee for the earlier period - no material is available on record that any enquiry of any nature has been carried out by any person including TPO to conclude that the transactions of SKF and for the earlier years for the assessee were the correct ALP or were done in circumstances so as to be at the ALP - The contention is that the only available option is to adopt TNMM as the method for determination of the ALP - CIT(A) and TPO were not justified in adopting the CUP method and the CIT(A) is upheld to adopt the method of TNMM for determination of the ALP and recompute the ALP in respect of the royalty – Decided in favour of assessee. Expenses incurred on repairs to building – Held that:- Following the decision in B.V.Ramachandrappa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 25,95,51,168/-. Aggrieved by the order of A.O., assessee carried the matter before the CIT(A) who vide order dated 27.01.2006 granted partial relief to the assessee. Aggrieved by the aforesaid order of CIT(A), the assessee and Revenue are now in appeal before us. 4. We first take up assessee's appeal in ITA No. 793/Ahd/2006 and the grounds raised are as under: 1. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the addition of ₹ 84.32 lacs on account of interest received by the appellant on Income Tax Refund despite the fact that the said interest had not become final during the year under consideration. 2. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in treating repairing expenses to plant and machinery of ₹ 133.77 lacs as capital expenditure instead of revenue expenditure as claimed by the appellant. 3. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in treating repairing expenses to plant & machinery of ₹ 120.16 lacs as capital expenditure instead of revenue expenditure as claimed by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical Services paid in excess of 1.5 % of the sales value is excessive and therefore deserved to be disallowed and thus confirming the disallowance of ₹ 375.91 lacs. a. The Ld. C1T (A) also erred in fact and in law in holding that if for any reason the adjustment made U/s. 92 on the count of Royalty payment is deleted, then it may be confirmed on the ground of it being excessive by invoking the provisions of section 375.91 lacs. 8. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in considering repairs to building amounting to ₹ 40.18 lacs as capital expenditure instead of revenue expenditure claimed by the appellant. 9. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in considering software expenses of ₹ 14.91 lacs as capital expenditure. 10. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming disallowance of ₹ 0.93 lacs made by the AO invoking provisions of section 14A of the Income Tax Act, 1961. 11. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra). Before us, no binding contrary decision in support of assessee has been placed on record. We, therefore, respectfully following the decision of Special Bench in case of Avada Trading Company (supra) and the decision of co-ordinate Bench in the case of assessee for preceding year, find no reason to interfere with the order of CIT(A) and thus, this ground of assessee is dismissed. 10. Ground no.2 & 3 are with respect to treating repairing expenses ₹ 133.77 lacs & ₹ 120.16 lacs as capital expenses. 11. During the course of assessment proceeding, A.O. on perusing the details submitted by the assessee, noticed that it had claimed ₹ 1,33,77,052/- & ₹ 1,20,16,250/- respectively on account of modification of various machines as revenue expenses. A.O. also noticed that the amount of expenditure incurred was almost consistent with the quantum of the expenditure incurred in the immediately preceding year. A.O. was of the view that the expenses have resulted in quality improvement, technology upgradation and better fuel efficiency and has thus resulted into bringing into existence an asset or advantage of enduring nature. He, therefore, following the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier year, the matter in the year under consideration be also similarly, restored to the file of A.O. Ld. D.R. on the other hand submitted and pointed out to the findings of A.O. where A.O. has noted that assessee did not submit the required details called for by the A.O. He, therefore, submitted that in such circumstances, A.O. was fully justified in disallowing the claim of assessee. He, thus, supported the orders of A.O. and CIT(A). 15. We have heard the rival submissions and perused the material on record. Before us, it was submitted that in the assessee's own case identical issue was before the Tribunal for A.Y. 2001-02 and the matter was remitted back to the file of A.O. We find that the co-ordinate Bench of Tribunal in ITA Nos. 792 & 816/Ahd/2006 had held as under: "12. Having heard the submissions of both the sides and on careful perusal of the compilation filed before us, one thing is evident that certain explanations were furnished before the AO but those were not supported by the requisite evidences. Even in the compilation from pages 211 to 289, the assessee has furnished certain details of the bills of repairs and details of replacement of furnace. The assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the business processes and the payment was made as fees for having access to this software for business purpose. He was therefore of the view that assessee has acquired a new asset or new advantage of enduring nature. He accordingly considered the entire expenditure to be capital in nature for intangible assets but however, allowed depreciation on the same. 18. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) decided the issue by holding as under: "9.2 I have considered the submissions of the appellant. The appellant has filed the copy of agreement dated 1-1-2001 & copies of bills for expenditure. It is seen that during the year, the assessee has made two types of payments in connection with SAP software. The payment of ₹ 84,24,564/- is towards monthly charges for operating and licence fee. This issue has been discussed by me while dealing with ground of appeal No. 8 for the Assessment year 2001-02 and it has been held by me that the expenditure is revenue in nature. For the reasons discussed in my appellate order for Assessment year 2001-02, in the current year also, the Assessing Officer is directed to allow the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure of 105 lakhs, the assessee has obtained license for long term use of the software and thus obtained advantage of enduring nature. The expenditure has to be treated as capital expenditure. It is, therefore, held that the expenditure of ₹ 105 lakhs was rightly treated as capital expenditure by the Assessing Officer. The ground of appeal No.5 is partly allowed." 19. Aggrieved by the order of CIT(A), the assessee is now in appeal before us. 20. Before us, ld. A.R. reiterated the submission made before A.O. and CIT(A) and further submitted that the issue in the present case is covered in favour of the assessee by the decisions Hon'ble Delhi High Court in case of CIT vs. Asahi India Safety Glass Ltd. in ITA Nos. 1110/2006 & 1111/2006, decision in the case of JCIT vs. Citicorp Overseas Software Ltd. 85 TTJ 87 (Mum), IBM India Ltd. vs. ACIT 105 ITD 1 (Bang.) and other decisions. Ld. D.R. on the other hand supported the order of A.O. 21. We have heard the rival submissions and perused the material on record. The fact of incurring of expenditure for SAP on account of user licencee fee and on account of reimbursement is not in dispute. We find that Hon'ble Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried the matter before the CIT(A). CIT(A) upheld the order of A.O. 25. Aggrieved by the order of CIT(A), the assessee is now in appeal before us. 26. Before us, at the outset, ld. A.R. submitted that the issue in the present case is directly covered in favour of the assessee by the decision of Tribunal in assessee's own case for A.Y. 2001-02. He further submitted that since the facts of the case in the year under appeal are identical to that of A.Y. 01-02, the issue of expenditure on knowhow fees be allowed in favour of the assessee. Ld. D.R. on the other hand supported the orders of A.O. and CIT(A). 27. We have heard the rival submissions and perused the material on record. We find that the issue of payment on knowhow fees by the assessee to FAG Automobiltechnik AG, Germany by the agreement dated 30.03.2000 was before Tribunal in ITA Nos. 792 & 816/Ahd/2006 for A.Y. 01-02. The issue was decided in favour of the assessee vide order dated 30.09.2011 by holding as under: "6. We have heard the parties at some length. We have carefully perused the orders of the authorities below in the light of a voluminous compilation filed, before us containing almost 400 pages and the case l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a know-how is acquired under an agreement is merely a licence for the user, if it is for a limited period, if the knowhow is without the right to use the patents and trade marks then if any payment made would no bring into existence an asset of enduring advantage to the Indian participants. This Circular therefore states that the payment should be regarded if expenditure incurred fop the purpose of running the business during the period of agreement. An another argument has also been extended that there were series of agreements, however, the know-how initially was acquired out of an agreement dated 30/08/1996. The changes in the provisions of section 32 were made subsequently from 1st day of April, 1998, therefore not applicable in the case of the assessee. It has been clarified that the agreements executed later on, had in fact, arose out of the original agreements which were in operation since inception of the company. In the light of the factual background, we have scrutinized the case laws cited before us. We have noted that in one of the case it was held that if the payment is made for exclusive acquisition of technical know-how, then the expenditure is capital in nature, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions are without prejudice to the oral arguments advanced during the course of hearing of appeal. Brief Facts 1. The Appellant is in the business of manufacture of ball and roller bearings. The company is one of the largest manufactures of bearings in India. During year the Appellant had benchmarked its international transactions with associated enterprises (AEs) using Transaction Net Margin Method ("TNMM"). The economic analysis for the purpose of benchmarking the international transactions was carried out by segmental division of the activities of the company in the manufacturing segment and distribution segment. Following table gives the comparative figures as per the Transfer Pricing Study: Segment Manufacturing Distribution PLI - Appellant 9.55 % 15.08% PLI - Comparables 9.79 % 2.19% Upward Adjustment made Accepted 2. The Additional Commissioner of Income Tax, Transfer Pricing - I, Mumbai ("the TPO") has accepted TNMM as the most appropriate method for benchmarking the international transactions with AEs (refer para 5.3 on page 5 of the TPO's order). The TPO has also accepted the set of comparable companies selected by the Appellant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technology (a) FAG Kuglefischer Georg Schaefer AG Nil 8,194,643 8,194,643 Royalty (b) FAG Industrial Bearings AG 42,172,305 6,907,060 49,079,365 Royalty (c) FAG Automobiletechnik AG 6,552,090 Nil 6,552,090 Royalty Total 48,724,395 15,101,703 63,826,098 (XV) Testing Charges 1,448,598 Nil 1,448,598 Only DTA (xvi) Receipt of Consultancy services fees 16,220,746 Nil 16,220,746 Distribution An analysis of the above International Transactions gives the following findings: (a) Item No. (i) and Item No. (xvi) pertain to the distribution segment (though shown in this table in DTA) and since no adjustment is proposed in distribution segment, they are not relevant for the present appeal. (b) Item No. (viii) is purchase of capital goods. (c) Item No. (xiv) pertain to Royalty for which separate submissions are made (d) Item No.s (iii) and (x) pertain only to EOU and since no adjustment is proposed in EOU, they are not relevant for the present appeal. (e) Item No.s (ii), (iv), (v), (vii) and (xi) are common nature of expenses for DTA and EOU. For same expenditure the ALP in EOU is accepted. Same price lists and same transfer pricing policy is followed by the Company for supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings, the TPO informed the Assessee that he proposes to bifurcate the profits of the manufacturing segment into DTA and EOU and carry out the comparison. CIT (A) 9. The CIT(A) in her order vide para 10.7.14 to 10.7.18 has affirmed the view of the TPO that it is proper to bifurcate the manufacturing segment into DTA and EOU. 10. The CIT (A) observed that though TNMM is appropriate method for all the transactions, for Royalty CUP should be applied. The CIT (A) further observed that though no Uncontrolled Transactions were available for comparison, the CUP for the Royalty should be with reference to the Controlled Transactions being Royalty paid by SKF to its Parent Company and by Assessee himself to its related party for the earlier years. The CIT (A) accordingly observed that all the royalty paid (including lump sum payments and taxes) over and above, 1.5 % of the sales, will be adjusted. It may further be submitted that while the TPO had not proposed any adjustment to Royalty paid to EOU, the CIT (A) proposed that even in case of EOU, Royalty paid in excess of 1.5 % should be upwardly adjusted. The CIT (A) accordingly confirmed the adjustment aggregating to ₹ 375.91 lacs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailing in the market, etc. However, the person to whom the sales is made (i.e. Domestic and Exports), cannot be the ground on which the distinction should be made. Accordingly, such sub-segmentation is not in accordance with law. 14. The TPO has contended that the DTA and the EOU represent two distinct and separate segments with different risk profiles, different profiles completely separate and therefore, though they have common nature of transactions cannot be benchmarked jointly. However, while doing so, the TPO uses the same set of comparables for comparing the DTA segment and EOU segments. Therefore, the comparable set are comparable with both DTA and EOU, as per TPO, but DTA and EOU amongst themselves are not comparable. This is completely illogical. To put it differently, if A is equal to B and A is also equal to C, then B is equal to C. However, as per TPO A is equal to B and C, but B and C are not equal. It is submitted that the bifurcation is done by the TPO not on any logical ground but for the sake of enabling the adjustment. Since the TPO has used the same comparable set for comparing both the segments, he has accepted that FAR of both the segments are comparable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 74,03,728. d. Added to above, the International Transaction in the nature of Capital Goods, part of the Balance Sheet of ₹ 5,19,25,936, aggregating to ₹ 14,81,68,414. e. From the above, reduction of the Royalty of DTA and EOU Segment both) of ₹ 6,38,26,098. It may be noted that Royalty of EOU of ₹ 1,51,01,703 was not included in the above aggregate. Despite this fact, it was reduced from the aggregate. 18. It is most respectfully submitted that the computation made by the CIT (A) is without application of mind and makes addition of items in the nature of revenue expenditure, income, capital expenditure and reduces therefrom the item of expenditure which was not included at all. Without Prejudice - If DTA segment is Separately considered 19. Without prejudice to the contention that artificial bifurcation of DTA and EOU cannot be made, the Appellant contends that even if DTA segment is to be benchmarked separately, then the following aspects needs to be considered: a. As observed by the TPO, the profitability of the EOU is more than that of the comparable set of companies and therefore pricing of all the transactions of EOU are accepted to be AL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces in nature of products, target consumer group and marketing strategy. According to TPO, it would be fair to analyse CPD (imports) separately keeping CPD (locals) apart and, therefore, he had segregated divisional accounts under trading function, into CPD (local), CPD (imports) and SPD. TPO, therefore, redrew accounts of CPD and SPD divisions and on that basis recommended two additions of ₹ 1.12 crores and ₹ 1.15 crores as TP adjustments. Assessing Officer accepted recommendations of TPO and enhanced assessee's income to that extent. Held, (i) that in the transfer pricing report filed by the assessee before the Assessing Officer, the comparables were chosen after extensive exercise and a net profit of 2.8 per cent, was adopted as the arm's length margin for benchmarking the trading activity of the assessee. The TPO had bifurcated the trading activity into two separate division of consumer product division and system product division but had assumed the consolidated profit margin of 2.48 per cent, of the comparables as the common net margin indicator. The TPO had also reworked the financial of the assessee without making any corresponding adjustment in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing adjustment with respect to gross sales of the assessee of ₹ 119.04 crores on the basis of arms-length-margin of 4.22 per cent. The case of the assessee is that total purchases by the assessee with associate enterprises in relation to which transfer pricing provisions have been applied was only to the tune of ₹ 15.81 crores. The limited dispute raised is regarding transfer pricing adjustment in relation to international transactions entered into by the assessee with associate enterprises. There is no dispute either regarding TNMM method followed by the Assessing Officer or about variables selected for computation of transfer pricing adjustment. The only dispute raised by the assessee is whether the transfer pricing adjustment should be computed with respect to gross turnover of the assessee or should be limited to volume of transaction entered into with the associate enterprises. Therefore, adjustment has to be made only with respect to purchases with associate enterprises. The Hon'ble Bench has held that the claim of the assessee is very reasonable as the adjustment has to be made only with respect to transactions with associate enterprises based on arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of low margins in the DTA has held that the addition on account of differential operating margin should be restricted only to the international transactions with AEs. The CIT(A) restricted the addition to ₹ 59,12,396 instead of ₹ 13.84 crores made by the AO. However, while dealing with the said adjustment the CIT(A) held that the transaction of royalty should be benchmarked separately applying CUP method [para 10.7.10 page 59 of CIT(A) order]. 25. The CIT(A) has rejected the contention of the Appellant that while applying TNMM since royalty payment was considered as part of cost the same cannot be benchmarked separately particularly when the margins of the EOU have been accepted to be at arm's length. 26. The Appellant has computed the ALP using TNMM. The TPO has accepted the fact that separate benchmarking of transactions is not possible (refer third para in para 5.8 at page 22 of the transfer pricing order). However, the CIT(A) has held that the entire royalty payment is to be benchmarked separately. 27. We most respectfully submit that the action of the CIT(A) in benchmarking the royalty payment on total basis suffers from inherent errors. It is an admitted fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that when applying the CUP method as the transaction done by the assessee was continuous transaction with the AEs, the consolidated effect of all the transactions between the assessee and the AEs must be considered as a whole. As otherwise it would lead to a situation where the assessee would be making very high margins in some cases and very low margins in some cases and where the transactions show high margins, the same would stand accepted and in the transactions were low margins, the same would call for an adjustment, which would in effect be inflating the margins of the assessee to disproportionate levels. This was not contemplated under the provisions of Sec.92C of the Act. The Assessing Officer may be directed to take into consideration all the transactions as a whole when computing the ALP. These transactions clearly show that what is done by the assessee is one of purchase and sale. With this in mind reading of the provisions of section 92C shows that the word used is 'nature of transaction', 'nature of transaction' would be a particular set of transaction, which are to be seen together. When the assessee is buying from one place and selling at another th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parent of SKF Bearings India Ltd. The Fundamental principle of CUP is that the comparable transaction has to be "Uncontrolled Transaction" meaning that it has be a transaction between two parties who are not related to each other. SKF transaction is not eligible to be treated as CUP as it is with related party. 32. The TPO and the CIT (A) has further relied upon the rates of Royalty paid by the Assessee during the earlier years. It is most respectfully submitted that this transaction is also with related parties as it is given to a related party of the Assessee for the earlier period. It is difficult to understand as to how earlier transaction between the same related parties be treated as benchmark for the same transaction with the same related parties for subsequent period. It is submitted that there is absolutely no justification for using either of the two comparables. 33. It is further submitted that there is absolutely no evidence available on record that any enquiry of any nature has been carried out by any person including TPO to conclude that the transactions of SKF and for the earlier years for the Assessee were the correct ALP or were done in circumstances s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE. The lower authorities, therefore, disallowed the royalty paid in respect of the goods sold to the AE. On further appeal to the tribunal, the Hon'ble bench has held that the royalty was paid on the basis of approval letter issued by the RBI. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce and Industries, Department of Industrial Policy & Promotion, issued in 2003, under which royalty payment @ 8% on export sales and 5% on domestic sales have been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified under the CUP method. 37. In the case of Cadbury India Ltd. v. Addl. CIT ITA No. 7408/Mum/2010 for AY 2002-03 dated 13-11-2013 it has been held that as the payment is made as per the approval given by the RBI and SIA, Government of India, there cannot be any scope of doubt that the royalty payment on technical know is not at arm's length. The Hon'ble Tribunal vide para no. 39 of the order held that, "39. On going throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Nor such data is shared with the Appellant before using for benchmarking the transactions. Further, no effort has been made to find out any comparable for the royalty transaction. The TPO has directly concluded that as a matter of last resort controlled transactions can be used before in fact even trying to find out a comparable transaction for royalty payments. No effort has been made by the TPO to search a comparable case. Further, the transaction of payment of royalty in case of SKF is a payment by associated enterprise and therefore does not satisfy the test of comparable uncontrolled price. 40. We rely on Tecnimont ICB (P) Ltd. v. Addl.CH 138 ITD 23 (Mumbai) (TM) wherein it has been held that net profit margin realized from a transaction with an AE cannot be taken as a comparable being internal comparable for computation of ALP of an international transaction with another AE even though said net margin from a transaction with AE is found and accepted at ALP. 41. Further, there is no data available on record which proves that payment of royalty @ 1.5% is at arm's length using CUP method. The CIT(A) has made comparison of the royalty paid by the Appellant in earlier year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into an agreement for obtaining license to manufacture specified insecticides and pesticides and agreed to pay 5 per cent royalty on the value addition and RBI has approved the royalty at 5 per cent for a period of seven years. This issue for the first time was examined by the TPO on the basis of the TP report of assessee wherein assessee submitted that the arrangement is in the nature of contract manufacturers in the FAR analysis. The TPO without examining the nature of agreement or the manufacturing activity of assessee or any other incidental factor came to a conclusion that since assessee admitted to be a contract manufacturer, there is no need to pay any royalty. Accordingly, the TPO has calculated the arm's length price of the royalty at Nil on the ground that assessee was not making any sales to outside parties. On further appeal the Hon'ble Tribunal held that the TPO has to examine whether the price paid or amount paid was at arm's length or not under the provisions of Transfer Pricing and its rules. The rule does not authorize the TPO to disallow any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Milin Mehta Chartered Accountant Baroda 23rd September, 2014" 28.2. Written submissions of the ld.CIT-DR are as under: "Before the Hon'ble D Bench. ITAT. Ahmedabad In the case of FAG Bearings India Limited Appeal No. 793/Ahd/2006 (A) and 817/Ahd/2006 (D) for AY 2002-03 Submission relating to transfer pricing issues. Assessee Ground No. 6 -CIT(A) erred in partly confirming adjustment proposed by TPO to the extent of ₹ 375.91 lakh in respect of royalty and ₹ 59.12 lakh in respect of other transactions. Erred in holding that only royalty and FTS to the extent of 1.5% of sales value be treated as at arm's length. -CIT(A) erred in confirming action of TPO in separating the profits of DTA and then comparing the same to composite profits of other comparables, thus making an adjustment. Assessee Ground No. 7 -CIT(A) erred in invoking section 40(A)(2)(b) to restrain royalty allowance to 1.5% and also holding that if the addition u/s 92 is deleted, then it should be sustained on account of it being excessive. Revenue Ground of Appeal: -CIT(A) erred in reducing the addition of ₹ 13.84 crore to ₹ 4.35 crore. 1. CIT(A) - 10.7.7 to 10.7.14. Para 10.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin of 42.74%. Since the operating margins of comparable are 9.79%, the transactions in EOU has been accepted at arm's length by the TPO. The DTA related issue has been discussed at para 5.6 of the order. The DTA operating margin has been computed at page 12 at 2.78% as against the comparable margin at 9.79%. The TPO has, suitably altered the margin and accordingly, the value of transaction. The total international transaction in DTA area are ₹ 13.95 crore on expense side and ₹ 2.51 crore on income side. 8. The OECD guidelines state that, "1.42 Ideally, in order to arrive at the most precise approximation affair market value, the arm's length principle should be applied on a transaction-bytransaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. some long-term contracts for the supply of commodities or services, 2. rights to use intangible property and 3. pricing a range of closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of tax in regard to international transactions and income from international transactions has to be determined at arm's length price. Therefore, as per the provisions contained under sections 92 to 94, international transactions are to be taken into consideration. Therefore, segmental results are to be considered and not the profit at entity level. As regards the submissions of learned Department Representative that with reference to segmental results, each and every international transaction has to be considered separately because all the activities are separate and profit margin will be different. Learned Counsel objected to these submissions pointing out that it is not the appeal filed by the Revenue but by the assessee. He also submitted that the Tribunal has no power of enhancement that TPO has not at all considered the segmental results and, therefore, we refrain from making any observations with reference to the submissions made by the learned Departmental Representative and consider it appropriate to only observe that the Assessing Officer will consider the segmental results and determine the arm's length price in accordance with law. Consequently, these grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing segment and distribution segment. However, the Transfer Pricing Officer (TPO) has further bifurcated the activities of the assessee into domestic unit (DTA) and export oriented unit (EOU). Thus, the TPO artificially divided the manufacturing segment into two sub-segments, i.e. for exports and for domestic sales, but however kept the set of comparable companies same for both EOU and DTA. The ld.counsel for the assessee invited our attention towards the bifurcation of the International Transactions. Item-wise description of the International Transactions as contained on page-3 of the TPO's order. However, the ld.CIT(A) vide paras 10.7.2 to 10.7.4 in his order has held that the differential margin of the DTA segment and comparables should be applied only to the international transactions with AEs and not on the entire turnover of the DTA unit. Therefore, ld.CIT(A) has restricted the addition on account of lower margins of the DTA to ₹ 59,12,396/- as against ₹ 13.84 crores made by the TPO. This is duly supported by the decisions of the Coordinate Benches in the following cases:- (i) Phoenix Mecano (India) Ltd. vs. DCIT (2012) 17 taxmann.com 119 (Mum) (ii) M/s.Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the rival contentions. We find force into the contention of the ld.counsel for the assessee, therefore, we are of the considered view that the ld.CIT(A) and TPO were not justified in adopting the CUP method and, therefore, we direct the ld.CIT(A) to adopt the method of TNMM for determination of the ALP and recompute the ALP in respect of the royalty. Thus, this ground of assessee's appeal is also restored back to the file of ld.CIT(A) for recomputation of ALP after giving an opportunity of being heard to both the parties. Ground No.7 of assessee's appeal is allowed for statistical purposes. 30. Ground no.8 is with respect to expenditure incurred on repairs to building of ₹ 40.18 lacs. 31. A.O. noticed that assessee had incurred ₹ 14.34 lacs on account of office modernization and ₹ 25.84 lacs on account of repairs of building and the expenses were claimed as revenue expenses. A.O. also noticed that expenditure on account of office modernization was towards replacement of old false ceiling with new false ceiling and was therefore of the view that the expenditure was not of Revenue nature as it had resulted into new or different advantage to the assessee. He a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1922, the expression "current repairs" means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage (from head notes)." 11.2.1 Since in the present case, the expenditure on replacement of false ceiling is on renovating and replacing an asset, and not for preserving or maintaining an existing asset, it was rightly treated as capital expenditure by the Assessing Officer. 11.2.2 The ground of appeal No.8 is dismissed. 12. The ground of appeal No.9 relates to disallowance of expenses incurred on replacement of Flooring of DGBB Cell (Hall - I) amounting to ₹ 25.84 lacs. The Assessing Officer treated the expenditure as capital expenditure on the ground that the assessee had acquired a new and deferent advantage of enduring nature. The Assessing Officer allowed depreciation at the applicable rate. 12.1 During appeal proceedings, it was submitted by the appellant that the contentions of the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right in holding that expenditure incurred on replacement of the barbed wire fence with compound wall was revenue expenditure Respectfully following the aforesaid decisions, we reverse the orders of authorities below and direct the Assessing Officer to allow the claim of the assessee. In A.Y. 01-02, issue before the Tribunal was with respect to expenditure on replacing and fixing tiles, construction of shed, expenditure on expansion of tool room. The issue was decided in favour of the assessee by holding as under: "16. We have heard both sides. As far as the assessee's appeal is concerned the amount contested before us is ₹ 2,46,739/- towards construction of shed and ₹ 12,55,771/- towards expenditure on tool-room, totaling to ₹ 15,02,510/-. We have also examined the nature of repairs incurred by the assessee. Some of the expenditure was for replacement of old flooring, change of electrical wires, installation of partitions etc. There are series of decision, such as, Chowgule & Co. 214 ITR 523 (Bom) on this issue and placing reliance we hereby hold that sustenance of shed or building, etc. is definitely in the nature of "current repairs" as prescribed u/s. 31 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts were purchased. Our attention was invited on page Nos.298 to 305 of the paper book to demonstrate the softwares acquired by the assessee. It has also been explained that due to technological changes the old softwares were required to be replaced year-after-year. 18. Having heard the submissions of both the sides, we have found that the identical issue now stood Covered in favour of the assessee vide CIT vs. Varinder Agro Chemicals Ltd. 309 ITR 272 (P&H) and Amway India Enterprises v. DCIT 111 ITD 112 (Del)[SB]. The issue being covered therefore this ground of the assessee is hereby allowed." Before us, Revenue has not brought on record any contrary binding decision in its support nor could distinguish the facts with that of earlier years. We, therefore, following the decision of Co-ordinate Bench of the Tribunal in assessee's own case and for similar reasons, allow this ground of assessee. Thus, this ground is allowed. 42. Ground no.10 is with respect to disallowance u/s.14A. 43. Ld. A.R. at the outset submitted that due to smallness of amount he would not like to press this ground. Thus, this ground is dismissed as not pressed. 44. Ground no11 is with respect to confirmin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fined u/s 2(28A) of the Act was paid in foreign currency on foreign suppliers' credit. There is nothing to suggest that payment of purchase price has been made in installments nor it has been brought to our notice there was any such condition that the assessee will compensate the supplier by means of interest on the unpaid installments. There is no material before us suggesting that amount was paid to the bank nor any such findings has been recorded in the impugned orders. Rather, the Id. AR submitted that decision of the Id. CIT(A) for the AY 1999-2000 has not been contested further. In the absence of any material on record, we are of the opinion that the facts in the cited decision being altogether different, the said decision is not applicable in the case under consideration. .Since the Id. AR did not point out any infirmity in the impugned order of the Id. CIT(A) in following his own decision for the AY 1999-2000 while even the said decision of the Id. CIT(A) for the AY 1999-2000 has not .been placed before us , we find merit in the contentions of the Id. DR and therefore, have no recourse but to uphold the findings of the Id. CIT(A). Thus, ground no.1 in the appeal is dism ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue is covered against the assessee by the decision of Special Bench in case of CIT vs. FAG Bearing (India) Ltd. 306 ITR 60 (Ahd) (AT). Ld. D.R. on the other hand supported the order of A.O. 58. We have heard the rival submissions and perused the material on record. We find that in the case of DCIT vs. FAG Bearing (India) Ltd. (supra) for A.Y. 1999-2000 & 2000-01, (2008) 155 ITD 53, the Special Bench of Tribunal concluded that assessee is not entitled to deduction of prepaid lease rent pertaining to next financial year as no liability can be said to have been incurred merely on the basis of advance payments irrespective for the terms of lease agreement requiring the assessee to make payment lease rent in the month of March preceding financial year in which the asset is to be used. It further held that lease rent being the prepaid is to be allowed only in the year to which such payment relates in view of theory of matching concept. In the present case, we, therefore, respectfully, following the decision of Spl. Bench of the Tribunal allow this ground of Revenue. Thus, this ground of Revenue is allowed. 59. Before us, both the parties submitted that the ground nos. II to IV ..... X X X X Extracts X X X X X X X X Extracts X X X X
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