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TMI Blog2016 (12) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... tice u/s 148 of the Act. Accordingly re-assessment u/s 143(3) r.w.s. 147 of the Act was finalized on 31.12.2007 at Rs. 94,33,166/- after making addition of Rs. 21,78,003/- to the previously assessed income u/s 143(3) r.w.s. 148 of the Act on 31.3.2006. 3. In appeal before the first appellate authority assessee partly succeeded. Aggrieved, assessee is now in appeal before the Tribunal raising various grounds. 4. Ground no.1 which reads as below has not been pressed by the assessee and, therefore, the same is dismissed as not pressed. 1. The learned Commissioner of Income Tax (Appeals) UCIT (A)" erred in fact and in law in confirming the action of the AO in reopening the assessment by invoking the provisions of section 147 of the Income Tax Act, 1961 and completing the assessment, commenced under invalid and improper exercise of powers u/s 147 of the Act. 5. Ground no 2. Reads as follows :- 2. The learned CIT (A) erred in fact and in law in confirming the action of the AO in holding that the following items of income are not derived from industrial undertaking and therefore the Appellant is not entitled to deduction under 80IB on these items of income: Particular Amount Int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used outside India by any person other that the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant Is Imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2.- Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty percent of the total value of the machinery or plant used in the business then, for the purposes of clause (II) of this sub-section, the condition specified therein shall be deemed to have been complied with; (iv) in a case where the industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome and allocable expenses, so that only the manufacturing profits are allowed for deduction u/s. 80IB. In the case of Kashmir Art vs. CIT 213 CTR 421 (Del) it is held that interest on the FDRs kept as margin money is not business income. Thus, the same has to be excluded for the purpose of 80IB deduction. Ground No. 2, 3 & 4 are partly allowed and ground No. 5 is dismissed. 9. From going through the findings of ld. CIT(A) we observe that assessee is having some trading activities also along with manufacturing and ld. CIT(A) has directed the Assessing Officer to carry out necessary verification to calculate the profits attributable to the manufacturing activities only which are eligible for deduction u/s 80IB of the Act. As regards the claim of assessee for allowing deduction u/s 80IB for interest on fixed deposit given as margin money towards secured/credit from bank we observe that to the extent if the interest is from such fixed deposit which have been used to get the working limits from bank, judgment of Hon. Bombay High Court in the case of CIT vs. Jagdishprasad M. Joshi (supra) is squarely applicable wherein it was held that profits and gains derived from the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of calculating deduction u/s 80IB of the Act. We find that Hon. Supreme Court in the case of ACG Associated Capsules (P) Ltd. vs. CIT (supra) while adjudicating the issue relating to deduction u/s 80HHC has held as follows :- Explanation (baa) to section 80 HHC states that 'profits of the business' means the profits of the business as computed under the head 'Profits and Gains of Business or Profession' as reduced by the receipts of the nature mentioned in clauses (1) and (2) of the Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the head 'Profits and Gains of Business or Profession1 in accordance with provisions of sections 28 to 44D. In the computation of such profits of business, all receipts of income, which are chargeable as profits and gains of business under section 28, will have to be included Similarly, in computation of such profits of business, different expenses which are allowable under sections 30 to 44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Profession', ninety per cent of such quantum of the receipt cannot be deducted under Explanation (baa) to section 80HHC. [Para 11] Therefore, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under section 28, and if any quantum of the rent or interest of the assessee is allowable as an as an expenses in accordance with sections 30 to 44D and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) o/Explanation (baa) to section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head 'Profits and Gains of Business or Profession', is to be deducted under clause '!' (^Explanation (baa) to section 80HHC for determining the profits of the business, [Para 12] In the result, the appeal is allowed and the impugned order of the High Court is to be set aside. The matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C(2). 16. Brief facts in relation to this ground are that assessee entered into international transaction covered by section 92B of the Act which is supported by report in form 3CEB r.w.s.92E of the Act, As per this report assessee entered into international transaction with its Associated Enterprise (AE) namely- Liquid Controls Inc.(LCI) which is holding company having 26% voting power in assessee company and is associated enterprise in terms of clause (a) of section 92A(2). It will be worthwhile to discuss the product in which assessee deals in. The assessee i.e. LCIPL deals in high accuracy custody transfer liquid measurement and oil delivery equipments including aircraft refueling, LPG delivery equipment which are manufactured by Liquid Control Inc. or LCIPL itself. During the course of assessment proceedings assessee submitted a report on transfer pricing study of LCIPL for FY 2001-02 discussing the details relating to the scope of this study, summary of approach, frame work of transfer pricing regulations, over view of the AE, company overview, industry scenario, functional analysis-objective, functions performed, risks assumed, assets employed, economic analysis and conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer further observed that filters selected by the assessee to choose comparables by eliminating all companies engaged in the business other than manufacturing is incorrect as the assessee is engaged in both the manufacturing and trading activities. Accordingly the Assessing Officer applied the difference of the average operating sales ratio of 7.27% as against operating/sales ratio of 3.73% shown by the assessee and applied the difference of 3.54% [7.27% (-) 3.73%] on the total turnover of the assessee and made addition of Rs. 26,39,609/- to the arms length price u/s 92C(3) of the Act. 20. In appeal before ld. CIT(A) challenging the impugned addition of Rs. 26,39,608/- assessee also contended that the arms length price calculated by ld. Assessing Officer is not more than 5% of the value of international transaction thereby leaving no question to exercise the option of section 92C of the Act and also appealed that the excess of operating profit/upon sales ratio should have been applied only to the international transaction rather than total turnover of the assessee. Apart from this, assessee made following submissions before ld. CIT(A) against the addition made by the AO. i. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO has already adopted selective approach to identify comparables as it is revealed from wide variation in the PLI of four comparables arrived by the AO. v. Total transactions with associate enterprise do not exceed even 20% of total amount of similar transaction. In such a situation If addition Is made in the manner as laid In the order then such addition would exceed even gross taxable come offered by the appellant. 21. Ld. CIT(A) observed that out of the four surviving set of comparables are Bhartia Industries Ltd. 5.68%, Indfos Industries Ltd. 6.28%, Daniel Measurement 5.38% and Roop Telsonic 11.75% rejected Roop Telsonic Ultrasonic Ltd. 11.75% operating margin (being much higher) and accepted the remaining three as were having the operating margin between 5.68% to 5.38% and on average took the percentage of 5.78% as against the assessee's margin of 3.73% and accordingly after applying the difference of 2.05% in the total sales sustained addition of Rs. 15,28,582/- by observing as follows :- "6.3. I have carefully considered the facts of the case and the submissions of the appellant. For determination of arm's length price the appellant had provided set of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence of 2.05% on the total sale of about Rs. 7.4565 crores is Rs. 15,28,582/- is confirmed. Ground no.6 is partly allowed." 22. Aggrieved, assessee is now in appeal before the Tribunal. 23. Ld. AR submitted that assessee company which is engaged in the business of manufacturing and sale of positive displacement mass flow meters, pumps and turbine is 100% subsidiary company of Liquid Controls Inc. incorporated in USA (LCI) and part of Idex Corporation Group which has substantial experience, know-how and market presence, the manufacturer of positive displacement , mass flow meters, turbine and pumps etc., Assessee i.e. LCIPL has entered into cross border transactions with the LCI with regard to import of components and finished goods from LCI, export of fabricated items to LCI and payment of technical charges to technicians of LCI. Ld. AR also discussed about the ownership structure , overview of the associated enterprise, industrial scenario, functional analysis along with objects, functions performance, risks assumed, assets employment and its characterization. Submissions have also been made with regard to analysis vis-à-vis mapping of international transaction selection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emently argued and supported the orders of lower authorities and also to the working of ld. CIT(A). Ld. DR submitted that the appeal of the department has already been dismissed due to low tax effect and submitted that power of TPO to select comparables is not limited to the document but has also the power to other source in order to find out the comparables and urged urge that the order of ld. CIT(A) should be upheld. 27. We have heard the rival contentions and perused the record placed before us. Assessee is aggrieved with the action of ld. CIT(A) sustaining the addition of Rs. 15,28,552/- u/s 92C(3) of the Act. We do not consider to reiterate the facts discussed above, but briefly we observe that following transactions were entered into by the assessee i.e. LCIPL as its Associated Enterprise, Liquidity Control Inc (LCI), USA - i) Import of components of Rs. 10781520/- ii) Import of finished goods of Rs. 14555120/- iii) Export of fabricated items of Rs. 6436799/- iv) Payment of technical charges to AE for Deputation of technical knowhow by AE Rs. 10,42,744/- We observe that during the course of assessment proceedings assessee has reported an operating profit margin of 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he lower authorities against the inclusion of Danial Measurement Ltd. We are, therefore, of the view that to the extent of selection of comparable we upheld the decision of ld. CIT(A) for taking three companies Bhartia Industries Ltd., Indfos Industries Ltd. & Danial Measurement Ltd. having average operating profit/sales margin of 5.78%. Now the issue as to whether differential operating profit margin which is in this case is 2.05% is to be applied on the total turnover of assessee or should be restricted only to the international transactions taken place with the Associated Enterprise. We find Hon. Bombay High Court in the case of CIT vs. Ratilal Becharlal & Sons (supra) has held that adjustment arising out of Arm's Length Price (ALP) has to be restricted to only international transactions with Associated Enterprise instead of entire turnover of assessee. Relevant portion of the judgment of Hon.High Court is reproduced below :- 2. The Revenue urges the following questions of law for our consideration:- "(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the adjustment arising out of the Arm's Length Price (ALP) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [Income Tax Appeal No. 1814 of 2013, decided on 5th October, 2013] and C/7~v. Keihin Panalfa Ltd. in ITA No, 11 of 2015 decided on 9th September, 2015, wherein the view taken by the Tribunal in the impugned order has been approved. (d) Chapter X of the Act inter alia deals with computation of income from international transactions having regard to the ALP. Section 92 thereof specifically brings to charge income arising from International Transactions with an Associated Enterprise to tax on computation of income having regard to the ALP of the transactions entered into between the Associated Enterprises, as the heading of Chapter X itself indicates that these are special provisions relating to avoidance of tax and the mandate is to ensure adjustment in respect of the International Transactions with Associated Enterprise or specified domestic transaction on the determination of ALP. It does not allow adjustment of the income on the basis of determining of ALP in respect of all the Assessee's transactions. If the contention of the Revenue is to be accepted, it would result in taxing non-existing income/profits of transactions entered into between the Respondent Assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer is within tolerance range of (+/-) 5% as provided in proviso to section 92C(2) of the Act. We are, therefore, of the view that in the given facts and circumstances, the price at which international transaction has actually been undertaken shall be deemed to be arm's length price and we accordingly set aside the order of ld. CIT(A) sustaining addition of Rs. 15,28,582/-, delete the impugned addition and allow the ground of assessee. 31. Ground no.7 reads as under :- 7. The learned CIT(A) erred in fact and in law in not giving any decision on the issue of disallowing Managing Directors remuneration amounting to Rs. 15,69,000. 7.1 The CIT(A) erred in referring the matter back to the AO for verification despite the fact that such powers are not available to the CIT(A) and the CIT(A) ought to have decided the issue on merits. 7.2 The learned CIT(A) erred in fact and in law in confirming the action of the AO in invoking the provisions of section 40A(2) of the Act despite the fact that there is no finding on record that the remuneration paid by me appellant i^ unreasonable or excessive as compared to the market price. 7.3 The learned CIT(A) ought to have followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l before the Tribunal. Ld. AR submitted that MD was paid a salary inclusive of bonus and commission at Rs. 31,13,004/- as against Rs. 15,44,004/- in the immediately preceding F.Y. MD is not a person covered under the provisions of section 40A(2)(b) of the Act which even not disputed by Revenue also. Increase in the remuneration was mainly on account of bonus at Rs. 4,05,000/- and commission of Rs. 9,12,000/-. Ld. AR further submitted that reasonableness of the expenditure can be doubted only if ld. Assessing Officer has brought on record of any comparable company as well as comparable remuneration payable to MD. Without bringing out any such basis such kind of disallowance should not have been sustained by ld. CIT(A). Ld. AR referred and relied on the 3rd Member decision in the case of Jagdamba Rollers Flour Mill Ltd. vs. ACIT in ITA No.93/Nag/2007 for Asst. Year 2004-05 vide order dated 27th October, 2008 and also relied on the judgment of Hon. Supreme Court in the case of Upper India Publishing House (P) Ltd. vs. CIT in Civil Appeals Nos.2396 & 2397 of 1978 dated 4th December, 1978. 34. On the other hand, ld. DR supported the orders of lower authorities. 35. We have heard the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relative of such director, partner or member; (vi) any person who carries on a business or profession,- (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. Explanation.- For the purposes of this sub- section, a person shall be deemed to have a substantial interest in a business or profession, if,- (a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and (b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is incurred wholly and exclusively for the purpose of business. It is not in dispute that such expenditure is otherwise allowable under s, 37. However, a part of the expenditure can be disallowed if it is shown-(i) that the payment was made to the persons specified in cl. (b) of s. 40A(2); and (ii) if it is found that expenditure is excessive or unreasonable, having regard to the fact that the market value of the goods, services or facilities for which the payment is made. No enquiry was made by the AO to ascertain whether the payment was excessive or unreasonable having regard to the fair market value of the services. On the other hand, the AO made the enquiry in a different direction i.e., whether the increase in the salary as compared to the salary paid in last year was justified on facts or not. Such enquiry is not required to be made as per the provisions of s. 40A(2)(a). The scope of enquiry under the above provision is with reference to the fair market value of the services rendered. In the absence of enquiry as contemplated by the provisions of s. 40A(2)(a), no disallowance could have been made or sustained. The onus was on the AO to bring the material on record to prove t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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