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TMI Blog2016 (7) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... r opinion, matter needs further verification. So, in the interest of justice we are restoring back the matter to the file of the DRP who would decide the issue after hearing the assessee. It may call for comments from the TPO. Disallowance of payment made to clubs - Held that:- The action of the AO is highly objectionable and not as per the provisions of the law. The AOs have to follow the directions of the DRP-they had no choice as far as following the directions of the DRP is concerned. They are authorised to challenge the directions before the Tribunal but they cannot refuse to carry out the directions. Therefore, only on this count the appeal of the assessee has to be allowed. But, even on merits the issue is covered in favour of the assessee by several judgements relied upon by the assessee. - Decided in favour of the assessee. Disallowance made u/s. 14A r.w.r.8D - Held that:- We find that during the year under consideration the assessee had received dividend income of ₹ 37.51 lakhs, that it explain to the AO that dividend warrants were deposited into bank accounts in a routine manner along with the other checks, that the assessee had sufficient own funds to make i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o effect of trading agreement. Disallowance of gift expenses - Held that:- We find that the assessee had filed objections before the DRP with regard to proposed addition by the AO. However, the DRP did not adjudicate the issue. Therefore, in the interest of Justice, we are restoring that the matter to the file of the DRP to decide the issue afresh after hearing the assessee Adjustment of opening stock - Held that:- In our opinion the basic principle of taxation jurisprudence stipulate that no item can be taxed twice. Considering the fact and circumstance of the case, the AO is directed to make further verification and to allow the adjustment as per the provisions of section 145A of the Act. He is to ensure that assessee does not suffer taxation for the same amount in two different assessment years - ITA/7978/Mum/2010 - - - Dated:- 25-5-2016 - Sh. Rajendra, Accountant Member and C.N. Prasad, Judicial Member For The Revenue :Shri G.M. Doss For The Assessee : Shri Paras Savla; Harsh Shah and Viraj Mehta PER RAJENDRA, AM Challenging the order dated 14/10/2010 of the Assessing Officer (AO), passed u/s. 143(3)r.w. s.144C(13)of the Act, the assessee has filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad comparable uncontrolled manufacturing functions, that it had no related party transactions, that it was possible to segment the financials of the company, that the margin of the assessee s MS could be compared with margin of internal transaction segment, that a similar statement had been made in respect of the trading activities. 2.1. After going through the segmental details, filed vide letter dated 27/8/2009, the TPO held that the total income appearing in the statement was ₹ 73522.64 crores, that the income allocated between MSings(MS)and TSings(TS)included not just that total turnover(Rs. 64858.62 crores)but also other income in the nature of intending commission, intending business would vary as compared to normal trading activity, that it was not correct on part of the assessee to include them in turnover for the purpose of calculating independent margin, that many of the expenses were distributed on the basis of turnover ratio, that consideration of only the commission amount and not the overall turnover of intending was bound to affect the segmental margins, that manufacturing services would cost the company use of plant and machinery, technology and other uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Total Grand Total Income 3, 665, 556 3, 233, 617 6, 899, 173 342, 031 111, 060 453, 091 20, 350 7, 372, 614 Expenses 3, 318, 08 2 2, 868, 860 6, 186, 942 343, 070 109, 232 452, 302 (6, 655, 728) Net operation profit 347, 474 364, 757 712, 231 (1, 039) 1, 828 789 3, 866 716, 886 Net operation profit (%) 9.48 11.28% 10.32% -0.30% 1.65% 0.17% Net Cost plus mark-up (%) 23.45% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany Name Sales NPM Source Anukaran Commercial Enterprises Ltd. 5.38 0.29 Annual Report Chembond Drew Treat Ltd. 28.38 12.30 Prowess Dhoot Industrial Finance Ltd. 54.08 -0.43 Annual Report Guljag Industries Ltd. 65.61 3.97 Prowess Hiran Orgochem Ltd. 39.95 0.72 Annual Report Indokem Ltd. 42.37 6.17 Annual Report K.P.L International Ltd. 26.43 17.26 Annual Report Nikhil Adhesives Ltd. 28.41 1.65 Annual Report P.H. Trading Ltd. 49.11 2.50 Annual Report Priya International Ltd. 4.18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition of ₹ 2, 80, 07, 290/- to the total income of the assessee. 2.4. Before us, the Authorised Representative(AR)submitted that the assessee had applied turnover criteria of greater than ₹ 1 crores, that the TPO on an ad hoc basis rejected companies stating little turnover, that he did not dispute the functional similarity of the comparables, that he wrongly rejected companies in the range of ₹ 4 to ₹ 6 crores despite turnover of TS of assessee being ₹ 11crores without appreciating that this range of turnover was in fact quiet comparable. With regard to ACEL the AR contended that the turnover of the company was ₹ 5.38 crores, that he arbitrarily rejected the said comparables, that the TPO had not challenged FAR, that it was a valid comparable as far as trading of chemicals is concerned. About PIL, he stated that turnover of the company was ₹ 4.18 crores, that the TPO had arbitrarily rejected it as a valid comparable. Referring to RL it was argued that the turnover of the company was ₹ 3.35 crores. Rest of the arguments were similar to the arguments advanced for the first comparable. He stated that if ACEL, PIL and RL were incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacturing cost pertaine to the MS, that the toll manufacturing cost had been appropriately considered by the assessee under the MS, that the income relevant to the cost pertaining to toll manufacturing transaction had also been allocated to the MS, that the TPO had accepted the stand of the assessee's allocation method based on the SAP system in the subsequent AY. s.i.e.2007- 08, 2008-09 and 2009-10, that certain expenses were grouped in segmental together, that on the total level the net profit was tying up with financials, that standard costs were used for the purpose of segmentation variance, that COGS was based on Standard and Actual. He referred to paragraph 13 of AS-17 and argued that the assessee had fairly and reasonably prepared the segmental profit and loss account between the manufacturing and TS based on the financial information captured by the internal financial reporting system of the Company for those segments, that the assessee had given a proper reconciliation to the TPO of the profit as per the segmental financial split and the profit as per audited financials which clearly evidenced that all the items of operating income and expenses had been considered and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd would sell locally, that the argument of the TPO that AE segmented export incentive was factually incorrect, that with regard to following of the standard costing system it is found that the assessee had given a proper reconciliation to the TPO of the profit as per the segment of financial split and the profit as per audited financials, that the reconciliation clearly established that all the items of operating income and expenses had been considered and accounted while preparing segmented financial split, that AE and the non-AE segment of the assessee were manufacturing agrochemicals, that the AE and non-AE segment under the MS were functionally similar, that internal TNM and analysis conducted by the assessee was correct, that intending commission and export incentive formed only 0.2% of the total turnover, that those expenses were not at all material to vitiate the segmental profitability, that the correct figure of manufacturing services was 70.33 crores and not 700.33 crores as reported by the TPO, that the profit disclose was ₹ 22.07 lakh and not 22.07 crores as held by the TPO, that separate books of a/c.s were maintained for the manufacturing services, that same ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO found that the assessee had incurred the above expenses towards annual subscription charges and cost of club services and facilities utilised by the executives of the company. He held that the expenditure had no business exigency, that expenditure was of capital nature. In his draft order he proposed the addition. The assessee filed objections before the DRP. In its order the DRP directed the AO that to examine the details of expenditure and to allow expenditure on account of subscription and club membership. However, in the final order the AO held the expenditure of capital nature and disallowed it. 3.1. Before us, the AR stated that the DRP had directed the AO to allow expenditure on account of subscription and club membership as a deduction after examining the details, that in the final assessment order the AO held that the assessee had taken a corporate membership of the clubs, that it would give enduring benefit to the assessee, that the expenses were towards payment of membership fees and annual subscription charges as well as towards the cost of services, that the expenditure was capital in nature, that he had not followed the directions of the DRP, the directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make disallowance as per the provisions of section 14A of the Act. The assessee filed objections before the DRP who gave partial relief to the extent of ₹ 6.65 lakhs. It deleted the addition proposed by the AO as per rule 8D(iii)of the Rules. While computing the total income of the assessee the AO did not allow the relief granted by the DRP. 4.1. Before us, the AR stated that assessee had sufficient own funds to make investments, that during the year under consideration additional investment of ₹ 1.90 lakhs only was made, that if interest-free and interest-bearing funds were available presumption would be that interest free funds were utilized, that out of the total investment and amount of ₹ 2.58 crores was in a subsidiary, that an investment of ₹ 20.48 lakhs were made out of compulsion, that those investments were made as per the requirements of the local authorities, that the investments were made out of commercial expediency and not with intention of exempt income, that the assessee itself disallowed a sum of ₹ 2.80 lakhs as expenditure incurred towards earning of exempt income, that the AO had neither controverted not recorded any objective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses were capital in nature, that same gave enduring benefit to the assessee, that the expenses could not be allowed under section 37 (1) of the Act. 5.2. Before us, the AR contended that the assessee had incurred expenses to test as to whether any of its existing products could be used for certain other crops , that the exercise was taken before selling the goods in the market, that the products were sold in the past for a specific crop, that if those products were to be used for other crops same were to be tested for/on product quality, bioefficacy and toxicology, that expenditure related to testing charges were paid for testing product, that assessee s product line was such that required concurrence of such expenditure, that by expanding the amount the assessee did not become owner of any capital asset, that fixed capital did not get enhanced by incurring of such expenditure, that same ought not to be treated a capital expenditure, that the expenditure resulted in smooth conduct of assessee s business. Alternatively , it was argued that the expenditure should be allowed as per the provisions of section 35 of the Act. The DR argued that assessee was not carrying out the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng but another word for computer programs i.e. instructions that make the hardware work. Software is broadly of two types i.e. the system software, which is also known as operating system which controls the working of the computer; while the other being applications such as word processing programmes, spreadsheets and databases which perform the tasks for which people use computers. Besides these, there are two other categories of software, these being: network software and language software. The knotwork software enables group of computers to communicate with each other, while language software provides the tools required to write programs. The aforesaid boat show that what the assessee required through A was and application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time to time based on the requirements of the assessee in the context of advancement of its amendments by law or by professional bodies like the Institute of chartered accountants of India, which are given the responsibility of conceiving and formulating the accounting standards f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and continued relationship, that it was in the nature of generating the goodwill, that it could not be considered to be a revenue expenditure, that the goodwill not being a depreciable assets depreciation was also not allowable. 7.2. During the course of hearing before us, the AR submitted that PPICSL was closely associated with the assessee is a tolling unit for over 30 years, that it made a huge investment in plant in 2002 in order to meet desired quality and quantity expectations of the assessee, that the plant was commissioned in September 2002, that the assessee had committed to PPICSL assured production of 15 lakh litres of raw materials, that due to market conditions assessee was unable to lift the committed quantities, that it was called upon to pay compensation by PPICSL, that it appointed a consultant to conduct a fair and independent valuation in order to take well-informed decision, that on the basis of television report and amount of ₹ 2.96 crores was determined as a compen - sation to terminate the agreement on mutual consent, that the compensation was paid for non-lifting of agreed quantity of raw material from PPICSL, that the payment was of revenue natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip in order to avoid losses occurring in the future through the relationship, whether pecuniary losses or commercial inconveniences, was just as much for the purpose of the trade is the making or the carrying into effect of trading agreement. Considering the above discussion, we decide GOA-16 in favour of the assessee. 8. Next ground of appeal is about disallowance of gift expenses of ₹ 22.49 lakhs. We find that the assessee had filed objections before the DRP with regard to proposed addition by the AO. However, the DRP did not adjudicate the issue. Therefore, in the interest of Justice, we are restoring that the matter to the file of the DRP to decide the issue afresh after hearing the assessee. Ground number 17 is decided in favour of the assessee, in part. 9. Last effective ground of appeal pertains to adjustment of opening stock of ₹ 5.53 crores. Before us, the AR relied upon the case of Mahalakshmi glassworks (P)Ltd. (318 ITR 116) and stated that the AO erred in not allowing consequential adjustment/enhancement of ₹ 5.53 crores to the value of opening stock of the relevant assessment year 2006-07 on account of addition made to the closing stock for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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