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TMI Blog2017 (6) TMI 1290X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT (A) erred in upholding that a disallowance u/s. 14A was warranted when an Appellant could show that. (a) it has sufficient interest free funds available to it (b) its claim was in accordance with the ruling of Reliance Utilities & Power Ltd. 313 ITR 340 (c) its investments were in a Group company Sandvik Steel Asia Private Ltd. and had no relevance to the issue of Sec. 14A. 3. The Ld. CIT (A) erred in confirming the disallowance of excise duty of Rs. 60,000 which have been included in the valuation of closing stock and actually paid before the due date of filing of the return. 4. The Ld. CIT (A) erred in confirming an adhoc addition of Rs. 75,000 by valuing stock of scrap as of 31.03.2005. The Ld. CIT (A) failed to appreciate that it was a consistent accounting policy of the assessee not to value any scrap at the end of each year in view of insignificant value involved. Further the CIT (A) failed to appreciate that as and when the scrap was sold and the proceeds have been offered for tax by the appellant and hence the action of the AO/CIT (A) amounts to a double addition/taxation. 5. The Ld. CIT (A) ought to have allowed depreciation of Rs. 2,89,808 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevented the assessee from furnishing such evidence before the TPO during TP proceedings? 2a. Whether on the facts and in the circumstances of the case, the Ld.CIT (A) was justified in deleting the adjustment made to international transaction of management Service fees amounting to Rs. 4,41,44,973/- ignoring the finding of the TPO and the Assessing Officer that no evidence in support of the claim was furnished by the asseessee during the course of TP proceedings? 2b. Whether on the facts and in the circumstances of the case, the Ld.CIT (A) was justified in deleting the adjustment made to international transaction of management service fees amounting to Rs. 4,41,44,973/- ignoring the finding of the DDIT(International Taxation)-I, Pune in the case of parent AE of the assessee company i.e. Sandvik AB, Sweden for the A.Y. 2005-06 that the said amount was received by Sandvik AB Sweden without providing any services to Sandvik Asia Pvt Ltd., which was also relied on by the TPO while determining the Arms' Length Price of the International transaction in respect of payment of Management Service Fees. 3. Whether on the facts and circumstances of the case, the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the observations of the CIT (A) in para 2.8.11 in holding that the assessee has to establish that it is entitled to full exemption where Rule 8D of the Rules is based on presumption and the calculation of expenditure is also on presumptive basis. The CIT (A) later on disallows the amount at Rs. 1 lakh, in the absence of application of Rule 8D of the Rules. 10. We have heard the rival contentions and perused the record. Admittedly, the year under appeal is assessment year 2005-06 i.e. the year when the provisions of Rule 8D of the Rules were not on Statute. The Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/ had held the said provisions to be prospective in nature, hence the same were not applicable to the year under appeal. Accordingly, the findings of CIT (A) in para 2.8.11 needs to be reversed. The CIT (A) himself though in the paras thereafter have admitted that the provisions of Rule 8D of the Rules are not applicable and in view of the provisions of section 14A of the Act, disallowance of Rs. 1 lakh was made. We uphold the said disallowance of Rs. 1 lakh under section 14A of the Act. Accordingly, the ground of appeal No.2 is dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee against adhoc addition of Rs. 75,000/- by valuing the stock of scrap as on 31.03.2005. 17. The assessee explained that it was its policy not to value any scrap at the close of the year and the said policy was consistently followed from year to year. However, the sale proceeds of the scrap were offered to tax when the same was sold. The Assessing Officer noted that the closing stock of assessee included scrap of 14,984 kgs. but its value was not considered. The assessee claimed that the value was insignificant to be considered as part of closing stock. The Assessing Officer however, made an addition of Rs. 12,66,148/- on account of value of closing stock of scrap. 18. The CIT (A) restricted the addition to Rs. 75,000/- by revaluing the stock @ Rs. 5 per Kg., estimated on adhoc basis. 19. The learned Authorized Representative for the assessee referring to the pages 144 and 156 of the Paper Book, pointed out that during the year consideration, the assessee had shown the income from sale of scrap at about Rs. 18 crores as against which the quantity of stock as on the close of the year was minimal. He further pointed out that consistent policy was being followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into various international transactions which are tabulated at page 2 of the order of TPO. For benchmarking the international transactions, the assessee had divided the activities under four heads as under:- (i) Manufacturing Tools Division - Manufacturing of machine cutting tools needed for drilling and machining were classified under this division; (ii) Manufacturing wires function - Manufacture of high resistance electrical wires, ribbons and heating elements were categorized in this division; (iii) Manufacturing Seamless Tubes and Pipes function; and (iv) Distribution - Import of finished goods for resale in the Indian market and performance of sales agent service have been categorized in this division. 25. The assessee had applied TNMM method with net profit margin as the Profit Level Indicator (PLI) in order to benchmark the arm's length price of its aforesaid four divisions. The TPO issued show cause notice to the assessee in respect of each of the divisions. In respect of manufacturing wires segment, the TPO noted that the said segment had been benchmarked separately by the assessee following TNMM method with external comparables. The T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en associated enterprises and non-associated enterprises segments. The CIT (A) rejected the plea of assessee that associated enterprises and non- associated enterprises segment could not be compared. The CIT (A) held that the assessee has failed to bring on record the extent of expenses of controlled transactions in non-associated enterprises segments. Further, the arguments of assessee to allow adjustment on account of geographical differences were also rejected in the absence of any details filed by the assessee. The CIT (A) thus, upheld the adjustment of Rs. 6,25,621/- made to the international transactions of manufacturing of wire. 28. The assessee is in appeal against the order of CIT (A). 29. The learned Authorized Representative for the assessee pointed out that 90% of its sales were in the domestic market. The learned Authorized Representative for the assessee further stated that the total export sales were to the tune of Rs. 46 lakhs and the sales in domestic market were to the tune of Rs. 24.10 crores. He further pointed out that the TPO had compared the domestic GP rate of 32.59% with the GP rate from export sales @ 19.13% to calculate the addition in the hands of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprises. The assessee had declared gross profit of 32.59% against domestic sales and 19.13% against the export sales to associated enterprises and the TPO had applied the difference of 13.46% to work out the addition in the hands of assessee. 32. The first aspect of the issue raised before us is the aggregation approach to be applied while benchmarking the transaction of manufacturing of wires. Where the international transactions undertaken by the assessee under the division of manufacture of wires are inter-linked, then the said transactions need to be aggregated for the purpose of benchmarking the arm's length price of the said international transactions. The aggregation approach has been accepted in the hands of assessee both in the earlier years and also later years. The learned Authorized Representative for the assessee has pointed out that in assessment years 2002-03 to 2004-05, the said approach had been accepted and thereafter in assessment years 2009-10 to 2012-13 have also been accepted. The learned Authorized Representative for the assessee pointed out that the appeals are pending before the Tribunal in assessment year 2006-07 and in assessment year 2007-08. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed transactions the Assessing Officer has accepted the method adopted by the assessee as well as determination of the ALP as per the T.P. study filed by the assessee. The contention of the assessee is that it had exported tractors to AEs for last several years and the assessee has adopted TNMM method as the most appropriated method for determining the ALP in respect of the transaction of export of tractors to the AEs from A.Y. 2004-05. The said contention of the assessee has not been disputed before us by the Revenue. Admittedly, for all those assessment years starting from 2004-05 onwards and also for the A.Y. 2008-09 the Assessing Officer has accepted the TNMM method as a most appropriate method for determining the ALP in respect of the sale of tractors by the assessee to the AEs. The assessee has filed the copies of the assessment order for the A.Ys. 2004-05 and 2005-06 which are placed in the Compilation (Page Nos. 282 - 285 of the P/B-2). The assessee has also filed the TPO's order for the A.Y. 2008-09 which is placed at Page Nos. 353 - 354 of the P/B-2. Though the TPO/DRP has gone on discussing the provisions of law but have conveniently ignored to put of record how the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various differences in the two segments in the form of marketing functions, credit risk, types of customers, etc. and hence, the CPM could not applied. The Tribunal held that considering the differences in the functions performed and the assets utilized, suitable adjustments are not possible to be made and hence, the said case CPM was not the most appropriate method for determining the ALP. The operating part of the discussion in the said decision is as under: 50. Considering the above submissions, vis-à-vis the method i.e. CPM (cost plus method) adopted by the learned TPO to determine the ALP, which has been relied upon by the learned Departmental Representative, we find that the learned TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment vis-a-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, no risk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c., which cannot be ignored as ultimately the income-tax is levied on net profit and therefore, comparison of the net profit of the domestic export segment is more proper. The assessee at page No. 141 of the paper book has given working of the net profit of the two divisions as per which, the net profit of the domestic segment is 13.04 per cent and that of the export segment is 12.55 per cent. We find that there is hardly any difference between two segments. We also find substance in the submission of the learned Authorised Representative that in respect of transaction with AE, the assessee also does not have to bear bad debt risks, product/warranty risks etc., hence some percentage of reduction should he given in the margin computed for the domestic segment for the above risk. 52. Considering the above material facts in totality, we are of the view that the learned TPO was not justified in adopting the CPM as the most appropriate method. On the basis that the assessee had a joint facility arrangement or a long-term buy and supply arrangement with its AE, as we have discussed hereinabove, we find that there was no sufficient reasons with the learned TPO to reject CUP method or TN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the CPM is an appropriate method for determining the ALP in respect of export of the tractors to the AEs and we approve TNMM as a most appropriate method adopted by the assessee for determining the ALP. We also hold that even after excluding KAMCL the average operating profit margin of the 7 companies are at 5.71% as against the 11.70% of the export segment of the assessee company. The ALP declared by the assessee is well within the limit. We, accordingly, hold so. In the result, the Ground No. 4 is allowed." 35. Applying the above said ratio to the present facts, we hold that TNNM method is the most appropriate method to be applied to benchmark the international transactions of exports to associated enterprises. The assessee aggregated all the international transactions under this division and applied TNNM method and found the transaction of exports to associated enterprises at arm's length. However, the Assessing Officer is directed to verify the said claim of assessee by applying single year's data and compute the adjustment, if any, in the hands of assessee after affording reasonable opportunity of hearing to the assessee. The grounds of appeal No.7 to 10 are di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available, the aggregate sales value of export to associated enterprises for all such cases, was approximately Rs. 11.74 crores, which was less than 15% of the total sales value of exports of Seamless tubes and pipes to the associated enterprises and hence, in such circumstances, CUP method could not be taken as most appropriate method. The TPO rejecting the submissions of assessee held that there was no merit in the aggregation approach taken by the assessee as the international transactions undertaken by the assessee were different in their nature and scope and their separate evaluation was possible. The TPO held that CUP method takes care of the difference on account of timing pricing in respect of raw material and any other such difference of volume. Thus, average over a larger period covering the entire year would take care of difference, if any, between the international transactions and the comparable uncontrolled price, as per TPO. The TPO thus, made an adjustment of Rs. 12,05,814/- to the international transactions relating to export of Seamless tubes and pipes to the associated enterprises. 39. The CIT (A) upheld the said addition in the hands of assessee by rejecting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income Tax Rules, 1962, the CIT (A) is empowered to admit the additional evidence in case the conditions laid down thereunder are satisfied. In the absence of Revenue pointing out any non-fulfillment of the said conditions under Rule 46A of the Income Tax Rules, we find no merit in the grounds of appeal No.1a and 1b raised by the Revenue. 42. The issue in grounds of appeal Nos.2a and 2b raised by the Revenue is against the order of CIT (A) in deleting adjustment made to international transactions of management service fees amounting to Rs. 4,41,44,973/-. 43. The learned Departmental Representative for the Revenue pointed out that the assessee had failed to provide the details of benefit received before the TPO and additional evidence is placed at pages 472 to 509 of the Paper Book filed before the CIT (A). He made reference to the remand report at pages 605 and 607 of the Paper Book, wherein payment to Sandvik AB was made but services were provided by the group concern. He admitted that the said amount was taxed in the hands of Sandvik AB, Sweden in India. 44. The learned Authorized Representative for the assessee placed reliance on the order of CIT (A) with special refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, no tangible benefits were derived by the Indian entity from such services claimed to have been provided to the assessee. In reply, the assessee explained that as per the terms of agreement, the services could be provided by Sandvik companies but the management services fees paid to Sandvik AB Sweden, in pursuance to the agreement between Sandvik AB Sweden and the assessee were correctly paid. The relevant part of the agreement reads as under:- * The definition of the term "Providing parties" in the 'Definitions' section of the agreement reads as "All or some of the Sandvik companies, which provide management services" (emphasis supplied) * Sandvik AB represents all the legal units working as "commissionaires" as per the Swedish legislation, meaning that the operations are conducted on behalf of Sandvik AB and any profits or losses are included in the accounts of Sandvik AB and other legal units providing management services. 47. The assessee submitted that the agreement was entered into with Sandvik AB Sweden, the services were to be provided not only by Sandvik AB Sweden but also by various companies forming part of Sandvik group, wherein Sandvik AB Sw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AB, Sweden. The learned AO has questioned rendering of services by stating that most of the e-mails are product information for the Appellant's distribution activity and accordingly the services were not rendered by Sandvik AB. However, he has reached contradictory conclusion and taxed income on account of rendering of management services. In other words, the learned AO has accepted that the income had arisen in the hands of Sandvik AB, Sweden on account of rendering of management services. I find that the learned AO has discussed the taxability of the same amount as dividend on 'without prejudice basis'. Therefore, taxability of the same as dividend is not the main but an alternative stand of the learned AO. Therefore, there is a contradiction in the position taken by the learned AO and the learned TPO with respect to the same transaction. As mentioned above, there is also internal contradiction in the learned Assessing Officer's draft assessment Order as well. It is needless to say that the positions of the both cannot be correct at the same time. These contradictions drastically reduce the reliability of the observation in the remand report. 2.6.26 Thirdly, I f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said facts and circumstances, where the assessee has established the factum of receipt of management services from Sandvik group entities, in accordance with the terms of agreement entered into by the assessee with Sandvik AB, Sweden and where the additional evidence in this regard was filed before the CIT (A), who in turn, has considered the same and has held that services provided by Sandvik group entities were in accordance with the agreement and were actually rendered by the associated enterprises. He also referred to the order of TPO in remand report, who had not doubted that the management services were not rendered at all but had stated that the same were rendered by group entities and not by Sandvik AB, Sweden and no adverse inference could be drawn for the same. In the totality of the above said facts and circumstances, we find merit in the claim of assessee and in view of gamut of evidences filed by the assessee establishing its claim of receipt of management support services from Sandvik entities, which in turn, was as per terms of agreement, then there is no merit in making any adjustment on account of payment of management fees. Upholding the order of CIT (A), we rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious years. In assessment year 2004-05, the Tribunal in ITA No.2469/PN/2012 in the appeal filed by the Revenue along with cross appeal of assessee in ITA No.2448/PN/2012, vide order dated 04.12.2015 had held as under:- '31. Briefly, the facts relating to the issue are that for the year under consideration, the assessee had incurred expenditure of Rs. 41,85,871/- for licence to use computer software for its operations. The assessee had claimed expenditure as revenue expenditure since the amount was used for the purchase of various applications software. The Assessing Officer was of the view that the expenditure incurred by the assessee resulted in enduring benefit and lump sum payment was made and hence, the same was expenditure of capital in nature. The Assessing Officer further held that there was no merit in the case laws relied upon by the assessee as the same related to period prior to assessment year 2003-04 and from the assessment year 2003-04, depreciation @ 60% was specifically provided for computer software. Accordingly, the Assessing Officer allowed depreciation @ 60% on the aforesaid expenditure resulting an addition of Rs. 16,74,348/-. 32. The CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed.' 35. The assessee for the year under consideration had also claimed to have incurred the expenditure on application software. However, the claim of the assessee was rejected being of enduring nature. We find no merit in the aforesaid disallowance made by the Assessing Officer in the case of assessee in view of the nature of expenditure incurred and also in view of ratio laid down in assessee's own case in earlier years. We uphold the order of CIT (A) in allowing expenditure incurred by the assessee on application software. The ground of appeal No.1 raised by the Revenue is dismissed.' 58. The issue arising before us is also in respect of expenditure incurred on software application. In view of the ratio laid down in assessee's own case in earlier years and the facts being similar, we uphold the order of CIT (A) in allowing the expenditure incurred on software application. The ground of appeal No.3 raised by the Revenue is thus, dismissed. 59. The issue in grounds of appeal No.4a and 4b raised by the Revenue is against the order of CIT (A) in deleting the addition of Rs. 19,52,000/- made on account of closing stock of obsolete inventory. 60. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal No.6 by the Revenue is against the order of CIT (A) in allowing set off of losses suffered by the newly set up EOU unit against its other business income. 65. The learned Authorized Representative for the assessee pointed out that the said issue is also covered by the order of Tribunal in assessment year 2004- 05, wherein it was directed that the losses of EOU unit can be set off against other business income vide paras 51 to 54 of the said order. The findings of Tribunal are as under:- "51. Now, coming to the second aspect of the issue raised by the Revenue i.e. the losses suffered by newly set up EOU unit, whether can be adjusted against other business income of the assessee. Under the provisions of section 71 of the Act, where the assessee has incurred losses under one particular head of income, the same can be set off against the income under any other head of income i.e. inter-head set off of profit and loss is recognized by the Act. 52. The Hon'ble Bombay High Court in Hindustan Unilever Ltd. v. DCIT & Anr. (supra) in an appeal relating to assessment year 2004-05 where reassessment proceedings were initiated under section 147/148 of the Act on several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble High Court held that the deduction under section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. The issue before the Hon'ble High Court was with regard to the adjustment of brought forward unabsorbed depreciation and loss of the unit, which were not eligible for deduction under section 10A of the Act and it was held that the same could not be set off against the current profit of the eligible units while computing the deduction under section 10A of the Act. 54. Following the above said proposition laid down by the jurisdictional High Court, we hold that the assessee is entitled to set off of losses of EOU unit against the other business income, if any, assessed in the hands of assessee for the captioned assessment year. Balance loss, if any, would be carried forward to the succeeding years to be adjusted as per the provisions of the Act. Accordingly, the ground of appeal No.3 raised by the Revenue is also dismissed." 66. The issue arising in the present appeal is squarely covered by the order of Tribunal in assessee's own case in assessment year 2004-05 and following the same parity of reasoning, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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