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TMI Blog2017 (8) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions - Held that:- Comparing only the depreciation cost of assessee and comparables will not serve the purpose as it will not gives the true and correct picture of the affairs. Hence, when high depreciation provided by assessee only on account of the new plant and machinery which is the state of art technology then the effect of reduction if any, in the cost of wages and salary has to be taken into consideration while comparing the depreciation cost of the comparable companies. Accordingly, on principle, we are of the view that if the assessee has brought on record a substantial difference in the cost of depreciation, then the depreciation has to be excluded to avoid the material difference. However, while undertaking this exercise of comparing the depreciation cost with the comparables, the other element and corresponding cost like wages and salary are also required to be taken into account. Accordingly, we set aside this issue to the record of the A.O./TPO for examining the same afresh Disallowance regarding testing fee by treating the same as capital in nature and further as FTS and by invoking the provisions of section 40(a)(ia) - Held that:- The testing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and has not brought into existence any new asset, then, having regard to the facts and circumstances of the case, we do not find any error or illegality in the order of the Ld. CIT(A). Appeal of the Revenue is partly allowed. - I.T.A.No.75/Del./2011 - - - Dated:- 31-7-2017 - SHRI VIJAYPAL RAO, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER For The Revenue : Shri Sanjay Kumar Yadav, Sr.D.R. For The Assessee : Shri, S.D. Kapila, Sr.Advocate Shri R.R. Maurya, Advocate Shri Sanjay Kumar, Advocate ORDER PER VIJAYPAL RAO, J.M. This appeal by the assessee is directed against the order of the Ld. CIT(A) dated 29.10.2010 for the A.Y. 2002-2003. The Revenue has raised the following grounds : 1. On the facts and circumstances of the case and in law , the orde r of the CIT ( A ) i s r roneous , perverse , ill egal and against the provis i ons of law wh i ch is liable to be set as i de . 2. On the facts and c i rcumstances of the case and in l aw , the Ld . CIT ( A ) has erred in deleting the addition of ₹ 3,97,52,421/- made on accoun t of d i fference of Arm ' s L ength Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng multiple international transactions with its A.E. The assessee applied different methods as most appropriate method for benchmarking its each international transactions. The TPO rejected the methods adopted by the assessee and applied TNMM as most appropriate method for determining the ALP in respect of the international transactions of import of raw material and import of other goods from A.E. The TPO has also applied internal CUP for determining the ALP in respect of export of goods by the assessee. The TPO while determining the ALP first applied TNMM on the entire turnover of the assessee and thereafter, for the purpose of determining the ALP in respect of export to A.E. the TPO applied internal CUP. Hence, the TPO proposed T.P. adjustment under section 92CA of the Act at ₹ 3,97,52,421. The adjustment proposed by the TPO in respect of goods imported by the assessee from A.E. was set-off against the adjustment worked-out by the TPO in respect of the exports made by the assessee to the A.E. as the adjustment was more than the adjustment worked out in respect of the import of the goods from the A.E. Therefore, finally the TPO proposed adjustment to be added to the income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of depreciation for the purpose of computation of margin. He has also referred to the impugned order of the CIT(A) and submitted that the CIT(A) has also not given any specific reason or exceptional circumstances for exclusion of depreciation for the purpose of computing the margins of the assessee as well as the comparable companies. Thus, the Ld. CIT(A) has committed an error while directing the TPO/A.O. to exclude depreciation while computing the margins for determination of ALP. 4.1. As regards the application of CUP as most appropriate method in respect of export of goods to the A.E. the Ld. D.R. has submitted that when there is an internal direct CUP available in the case of the assessee being sale of the same goods to the unrelated party then the sale price of export to the A.E. has to be tested with the comparable uncontrolled price. He has further contended that when an internal CUP is available, then, there is no scope on adopting any other method as most appropriate method. The Ld. D.R. has further submitted that assessee has contended before the TPO that there are various differences which effects the lower price of export as compared to the domestic price and qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out that export sales to A.E. constituted 42% of total sale. The A.R. has contended that the domestic sale price cannot be applied as CUP in respect of export made by the assessee to A.E. because of different geography as well as the incentives in respect of the export which were not available in respect of domestic sales. Therefore, the domestic sale price cannot be considered as CUP for comparing the export sales. The Learned Counsel for the Assessee further contended that the TPO has selected only those transactions of export which were found less than the domestic sales price and he has not considered several transactions which are more than the ALP being domestic sale price. Thus, the action of TPO in picking-up selected transactions is not justified when all the transactions are made to the A.E. All the transactions were not taken into account by the TPO while considering the ALP of the international transactions. Further, when the TPO has already tested the composite transactions with the A.E. under TNMM then further computation of ALP in respect of the export by applying CUP is a futile exercise. The Learned Counsel for the Assessee has further contended that when sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparison to the average depreciation to total cost ratio at 5% in respect of the comparables. Thus, the Learned Counsel for the Assessee has submitted that when there is a material difference in the claim of depreciation expenses and the depreciation cost of the assessee is many times more than the comparable then it is appropriate to exclude the depreciation and consider only the cash profits for the purpose of computing the margins of the assessee as well as comparables. The assessee has applied straight line method for estimated use of life as per the rates in Companies Act whereas in the case of one comparable namely Rungta Irrigation, the WDV (written down value) applied by the said company as per the I.T. Rules and the plant and machinery was for more than 12 years and therefore, the depreciation cost to the total cost was only 5.3% in respect of the said company. Whereas, the other comparable companies the depreciation cost was much less even ranging from 3.22% to 5%. Thus the assessee has provided depreciation at much higher rate amounting to full amortisation of all assets other than building over 05 years. The Learned Counsel for the Assessee has thus argued that consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions are multiple and inter-related then if a particular transaction out of the composite transactions cannot be tested under CUP then it is not proper to apply separate methods for determining the ALP for each of the transaction, particularly, when the international transactions are closely linked and inter-depending having direct bearing on the price of each other. Therefore, we are of the considered opinion that in the given facts and circumstances of the case, the TNMM method would be the most appropriate method for determining the ALP of the international transactions entered into by the assessee. Hence, we do not find any error or illegality in the impugned order of the Ld. CIT(A) qua this issue. We, therefore, uphold the order of the Ld. CIT(A) on this issue. 8. The next aspect of the T.P. issue is exclusion of depreciation while computing the margins of the assessee as well as comparable companies to benchmark the international transactions. There is no quarrel on the point that in the normal circumstances, the depreciation has to be part of the operating/total cost for the purpose of computing the margins under TNMM. The TNMM itself suggests that the net margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. However, while undertaking this exercise of comparing the depreciation cost with the comparables, the other element and corresponding cost like wages and salary are also required to be taken into account. Accordingly, we set aside this issue to the record of the A.O./TPO for examining the same afresh in the light of above observations and then adjudicate the same. Needless to say that assessee be given adequate opportunity of being heard. 9. Ground No.4 is regarding disallowance made by the A.O. regarding testing fee by treating the same as capital in nature and further as FTS and by invoking the provisions of section 40(a)(ia). The A.O. during the course of assessment proceedings noted that assessee has debited to the P L account a sum of ₹ 1,43,65,596 on account of development charges. The corresponding figure for last year was NIL. The A.O. asked the assessee to furnish details of testing fees paid and also as to why it should not be disallowed in terms of Section 40(a)(ia) as no TDS has been deducted on it. Alternatively, the A.O. also asked the assessee to explain as to why the expenses are not to be disallowed as capital expenditure. The assessee explained befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. He has relied upon the orders of the A.O. 12. The Learned Counsel for the Assessee submitted that payment in question is nothing but only for testing of the quality of the product at the A.E. place and therefore, there is no transfer of any technology or knowledge much less the making available of any knowledge or technical service by the A.E. to the assessee. He has further submitted that even if the A.E. of the assessee is using its expertise and knowledge in the process of testing the product of assessee the same i.e., a test for quality purpose and therefore, it does not fall under the definition of fee for technical services either under the provisions of Section 9(1)(vii) or under Article 12 of the India-US DTAA. The Learned Counsel for the Assessee further contended that since assessee has not incurred any expenditure on the installing, any facility or acquiring any technology, therefore, this expenditure cannot be capital in nature. He has further contended that even if the services are utilised in India, it has not been rendered in India. Therefore, it will not fall under the definition of fee for technical services or included services . He has relied upon the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of rendering any technical services by the A.E. to the assessee but simply it is an activity of quality test of the product which is carried out outside India. In the absence of any material to show that assessee is using any technical knowledge or services rendered by the A.E. in the manufacturing process of its goods it cannot be treated as any technical services rendered by the A.E. Therefore, we do not find any material or facts either discovered by the A.O. or otherwise available on record to show that assessee has paid the testing fee for acquiring any technical knowledge or receiving any technical services from the A.E. Thus, the payments of testing fee to the A.E. is not fee for technical services. Since A.E. of the assessee is not giving any permanent establishment in India, therefore, the said receipt/income in the hands of the A.E. is not taxable in India and consequently, the assessee was under obligation to deduct TDS at source. 13.1. As regards nature of expenditure being revenue or capital, we find that by incurring testing expenditure the assessee has not acquired any technology, advantage or enduring benefit but it is simply a quality test of its product ..... X X X X Extracts X X X X X X X X Extracts X X X X
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