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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 ..... de its order dated 28/09/2010. In pursuance of the said directions, the AO completed the assessment, determining the income of the assessee had Rs. 59.89 crores. 2. First ground of appeal relates to Transfer Pricing (TP)adjustments of Rs. 2.80 crores. During the TP proceedings, the TPO found that the assessee had entered into the following IT.s with its AEs: Sr.No. Nature of Transaction Amount(Rs.) 1. Import of raw material 112, 95, 51, 398 2. Import of traded products 7, 75, 70, 764 3. Export of finished products 80, 60, 91, 048 4. Sale of Asset 26, 29, 000 5. Payment of indenting commission 38, 84, 001 6. Import of Software 55, 62, 236 7. Provision of SAP support services 2, 03, 49, 405 8. Recovery of expenses 48, 65, 599 9. Reimbursement of expenses 10, 38, 28, 884 He found that the assessee had used the Internal Transaction Net Margin Method(TNMM), that net profit margin(operating profits/sales)was the Profit Level Indicator(PLI)for computing ALP of the above transactions, that the assessee had selected comparables from Prowess Data Base. While going through the Transfer Pricing Report (TPR), the TPO found that the assessee had comparable uncon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyed standard cost system for capturing the cost of manufactured goods sold, that in determining the standard cost the company would take into account all the budgeted material cost and manufactur -ing overheads to arrive at a standard cost per product, that the assessee's system would capture various expenses for determining the standard cost of products sold, that use of such costing data gave a more reliable picture of the business segment, that it had scientifically determined the costing data, that the balance operating expenses which did not form part of the costs of goods sold and which could not be directly identified and allocated to various business segments had been apportioned to the MS and TS on prudent and relational basis using logical allocation keys. Manufacturing Trading SAP- Support Service Segment (Rs. in'000) Transactions with third parties Transactions with Associated enterprise (AE) Total Transactions with third parties Transactions with associated enterprise (AE) 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, 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g margin for an internal comparison. The assessee carried out search to identify the external comparable for benchmarking its MS and TS. Under the head MS the OM was worked out. So, he held that import of raw material was at arm's length. For TS the assessee furnished margins of comparable as under identifying eleven comparables and the table read as under: Company 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 -3.06 Annual Report Roselabs Ltd. 1.0 3.29 Annual Report Arithmetic Mean 4.06 As per the TPO ACEL, PIL and RL had very little turnover as compared to the assessee which had turnover of Rs. 45crores. He rejected these companies on the criteria of turnover. He rejected DIFL, as it d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments advanced for the first comparable. He stated that if ACEL, PIL and RL were included in the final seven comparables of the TP order the margin of the 10 comparables would work out to be 4.51% even if combined trading margin of the assessee i.e.0.17% was considered, that the same would fall within +5% range, that internal TNMM was the MAM, that Dhoot was into trading of chemicals and other products, that while applying TNMM product similarity was not required, that KPLIL was also into various business, that for the purpose of consistency if Dhoot was to be rejected KPLIL should have also been rejected, that segmental results for KPLIL for indenting and trading showed an income of Rs. 32.24 crores of which traded chemicals revenue was only Rs. 17 crores, that if KPLIL was rejected from the final seven comparables in TP order the margin of the six comparables works out to be 3.09%, that even if combined trading margin of assessee was (0.17%)was considered, that the same would fall within +/- 5% range. On the proposition that Product similarity not relevant in TNMM, he relied upon the cases of GE India Technology Centre (P) Ltd. (30 taxmann.com 249)and Diageo India (P) Ltd. 34taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that all the items of operating income and expenses had been considered and accounted while preparing segmental financial split, that for application of TNMM it was not necessary that there had to be identity of products-rather functional comparability was essential, that the AE and non-AE segment of the assessee dealt in manufacture of agro chemicals, that both the segment under the manufacturing function were functionally similar, that the internal TNMM analysis conducted by the assessee was correct. , that the TPO had accepted the broad segmentation of the assessee between Manufacturing and Trading activities, that on the very same basis it had further dissected the Manufacturing and Trading activities into AE (associated enterprises) and Non AE segments, that he did not considered the AE and Non AE segmentation made by the assessee in the Manufacturing and Trading activities, that the MS was accepted, that TS should have been accepted, that in the subsequent years the TPO had accepted the system, that indenting commi - ssion and export incentives formed only 0.2% total turnover, that those expenses were not at all material to vitiate the segmental profitability, that the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were maintained for the manufacturing services, that same had been separately disclosed in segmental results, that the TPO and the DRP had accepted the IT.s. of MS, that no addition has been made for SAP services, that the TPO had made upward adjustment with regard to TS only and the DRP had confirmed it, that the assessee had applied internal TNMM for determining the ALP of the transactions it had entered in to with its AE.s., that the operating margin in the TS was 0.17%, that the weighted averaged arrived at by the assessee, using multiple year data, was 3.67%, that initially eleven comparables were selected, that in the final list of comparables only seven companies were picked up. We find that the assessee had specifically advanced the issue that if any adjustment was to be made it should have been restricted to the Transaction with the AE.s, not for the entire segment. In our opinion, the argument is very basis of TP adjustments. The TP provisions were introduced in the Act to prevent the practice of transferring the profit to the AE by adopting certain dubious methods. Naturally, the target should be the transactions with the AE.s and not the all the transactions. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed the directions of the DRP, the directions of the DRP were binding, that assessee had paid club membership exclusively and wholly for the purpose of business, that club membership only facilitated assessee to conduct its business more smoothly and efficiently. He relied upon the cases of Otis Elevators Company (India)Ltd. (195ITR682), Samtel Colour Ltd. (326 ITR 425), Infosys Technologies Ltd. (349 ITR 582). The DR left the issue to the discretion of the Bench. 3.2. We have heard the rival submissions and perused the material before us. We find that the assessee had claimed expenditure towards payments made to club on account of subscription and membership, that the AO decided to disallow the expenditure, that the DRP directed the AO to allow expenditure with regard to subscription and club membership after examining the details, that while finalisi -ng the assessment he admitted that payments were made towards membership fees and annual substation services, that he disregarded the directions of the DRP and made the disallowance. In our opinion, 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jective satisfaction with regard to expla -nation offered by the assessee. He relied upon the cases of HDFC Bank Ltd. (ITA.330 of 2012 of the Hon'ble Bombay High Court), Reliance Utilities and Power Ltd. (313 ITR 340), JM financial Ltd (ITA/4521/Mum/2012) Piem Hotels Ltd. (ITA/240/Mum/2012 and Bayer Bioscience(P)Ltd. (51 SOT 16). The DR stated that matter could be decided on merits. 4.2. We have heard the rival submissions and perused the material before us. We find that during the year under consideration the assessee had received dividend income of Rs. 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 investment, that it had made investments in subsidy companies, that on its own it had disallowed and amount of rupees 2.33 lakhs, that the AO had not given any reason as to why the calculation given by the assessee was not acceptable. He had simply applied the formula as envisaged by Rule 8D of the Rules. We are of the opinion that approach of the AO was contrary to the provisions of law. Considering the above facts, Ground 13 is decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf, that the government approved institutions were doing the job on behalf of the assessee, that expenditure could not be allowed as revenue expenditure. 5.3. We have heard the rival submissions and perused the material before us we find that while dealing with the objections filed by the assessee for the a why 2007-08 the DRP had allowed the direction under section 35 of the Act. In our opinion, the test to decide the nature of the expenditure i.e. capital or revenue expenditure the basic thing to be seen is as to whether the expenditure is for running the business of the assessee smoothly. If the expenditure is incurred for day-to-day business activities of the assessee and not for acquiring some asset it has to be allowed as revenue expenditure. In the case before us, it is a fact that no new asset came into existence. Secondly, the expenditure incurred was basically for carrying out the business. Payment to government agencies would not make any expenditure capital/revenue. Therefore, reversing the order of the AO, GOA -14 is decided in favour of the assessee. 6. Next ground is about disallowance of Rs. 2.25 lakhs, being computer software expenses. During the assessment proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that expenses may have to be incurred on account of corruption of the software due to unintended or intended ingress into the system-what not give a colour to the expenditure incurred is one on capital account. Given the fact that there are myriads factors which may call for expenses to be incurred in the field of software applications, it cannot be said that either the extent of the expense or the expense being incurred in close proximity, in the subsequent years, would be conclusively determinative of its nature. The Assessing Officer has erred precisely for these very reasons. The contention of the revenue that in the books of accounts the assessee had not written off the expenses in issue while in succeeding assessment year only a part of the expense had been written off and, therefore, the assessee's own understanding of the nature of the expense involved was that it was expended on capital account is to be rejected. The reason being: that the treatment of a particular expense or a provision in the books of accounts can never be conclusively determine native of the nature of the expense. And assessee cannot be denied a claim for deduction which is otherwise tenable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the expenditure was incurred for furthering that rate/business interest of the assessee. He relied upon the cases of Jamna Auto Industries(167 Taxman 192), Indo Asian Switchgears Private Ltd. (222 ITR 757) and Microsoft Corporation of India Private Ltd. (ITA 111 of 2008 of Hon'ble Delhi High Court).The DR supported the order of the AO and the DRP. 7.3. We find that the assessee had entered into an agreement with PPICSL to manufacture certain amount of raw material, that due to adverse market conditions it could not lift the goods from PPICSL, that it appointed a value of two determine the compensation to be paid to PPICSL, that the AO and DRP dated the said expenditure as capital expenditure. In our opinion, for allowing/ disallowing any expenditure u/s. 37 of the Act the basic thing to be seen as to whether the expenditure was incurred for furtherance of business interest of the assessee or not. It is a fact that in this case because of the expenditure incurred no new assets came into existence. The expenditure was incurred considering the old relation with the PPICSL and to avoid future business complications. If an assessee makes payment which is compensatory nature, it has t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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