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TMI Blog2021 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... memo, they have also filed three additional grounds which are as follows: "Claim of Education Cess 1. The appellant prays that the liability for education cess on income tax paid for the year ought to be allowed as tax deductable expenses while computing the taxable income. Consequential claim of Depreciation on the expenditure of premises 2. Consequent to the decision of Hon'ble ITAT for the AY 2004-05 to 2007-08 in relation to the disallowance of expenditure on premises to the extent of 40% of such expenses, being held to be capital in nature for the respective years under consideration, the Appellant prays for allowance of the consequential depreciation on the same, in the subsequent years including AY 2010-11. Consequential claim of depreciation on the Expenditure of software 3. Consequent to the decision of Hon'ble ITAT in the AY 2007-08, in relation to disallowance of expenditure of software amounting to Rs. 15,60,198/- incurred during the year were held to be capital in nature, the Appellant prays for allowance of the consequential depreciation on the same, in the subsequent years including AY 2010-11." 4. The Ld. DR recorded in his submission that he does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal by the assessee is allowed. 7. Additional Ground No.2 refers to the claim of depreciation on the expenditure of premises and as submitted by the Ld. Counsel for the assessee that this issue was also dealt in assessee's own case by the Pune Bench of the Tribunal in ITA No.736 & 732/PUN/2011 for the assessment year 2005-06. The question before the Tribunal was as follows: "2. Claim of Depreciation : Consequent to the decision of Hon'ble ITAT in the AY 2004- 05, in relation to disallowance of expenditure of premise amounting to Rs. 14,18,515, being 40% of the total expenditure incurred during the year, which are held to be capital in nature for such year under consideration, i.e. AY 2004-05, the Appellant prays for allowance of the depreciation the same, in the subsequent years, including AY 2005-06." The Tribunal on this issue has held and observed as follows : "35. The second additional ground is against the allowing of depreciation on the amount of capital expenditure incurred by the assessee on certain premises, which was partly held by the Tribunal to be not deductible in its order for the A.Y. 2004-05 36. We have gone through the relevant discussion made in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not only the depreciation granted by him for the A.Y. 2007-08 but also deemed depreciation at the rate of 60% for the next two years, whose assessments have been quashed. Only the remaining amount will constitute opening w.d.v. of the software development cost on this score. Accordingly, additional ground No.3 is allowed to this extent. 10. Thus, all the additional grounds raised by the assessee are allowed as indicated above. ADJUDICATION OF GROUNDS IN APPEAL MEMO 11. Now, we would adjudicate grounds referred before us in the appeal memo which are as follows: "The appellant objects to the order of the Hon'ble Commissioner of Income Tax (Appeals) - 13, Pune ["CIT (Appeals)"] dated July 27, 2015 for the aforesaid assessment year on the following among other grounds: 1. The Hon'ble CIT(Appeals) erred on following grounds for making an adjustment to the international transaction of export of finished goods on account of difference in price of similar goods sold to Associated Enterprises ("AEs") and Non-Associated Enterprises ("Non-AEs"): (a) The Hon'ble CIT (Appeals) erred in facts and circumstances of the case in rejecting Transactional Net Margin Method ("TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regards sales worth Rs. 7.72 crores, he held that CUP should be adopted as the most appropriate method on the basis that similar products has been sold to non AEs. He rejected the submissions of the assessee that the sales to AEs and non AEs cannot be benchmarked on CUP basis due to geographical difference, volume difference, timing difference, risk difference and functional difference. The TPO took the similar view in the previous year. 14. The Ld. CIT(Appeals) on this issue at Para 2.3.3 of his order has placed reliance on the decision of the Pune Bench of the Tribunal in the case of Henkel Adhesives Technologies India Private Limited Vs. DCIT, ITA No.1647/PUN/2011 dated 18.02.2015 for the assessment year 2007-08 and has held that on identical facts, the Tribunal had rejected the assessee's argument on TNMM applied by it and confirmed the decision of the TPO to apply CUP method to the assessee's international transaction of export of finished goods and import of raw material. The Tribunal granted relief to the assessee on account of risk adjustment @1% on sales made to non AE and for sales and marketing function performed for the sales made to non AE. Thereafter, the Ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee to its AE at Rs. 3.09 crore, the TPO found the assessee to have charged its AEs less by Rs. 2,24,11,726/-. He, therefore, held that if the assessee had sold such goods to third parties, the amount of sales would have been Rs. 5,33,87,694/- (Rs. 3.09 crore + Rs. 2.24 crore). As the assessee deliberately exported similar goods to its AE at price lower than that charged from non-AEs, the TPO held that the lower amount charged at Rs. 2.24 crore was liable to be considered as transfer pricing adjustment. The AO made this addition, which got sustained at the hands of the ld. first appellate authority. 6. We have heard both the sides and gone through the relevant material on record. The assessee declared an international transaction of `Export of manufactured finished goods' with value at Rs. 50.95 crore, whose ALP was determined by the assessee under the TNMM by aggregating it with other two international transactions of `Payment of Royalty' and `Import of raw materials and components'. The TPO did not accept the aggregation of transactions and determined the ALP of payment of Royalty separately under the CUP method. As regards the transaction of export of such manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 236.22. Here it is found that the price charged from AE is more than that charged from non-AEs even for more quantity. The entire case is like this. Normally, the quantity of sale of similar products to non AEs is several times higher than that sold to AEs. On an overview of Annexure-1, it is found that no doubt the assessee charged less price from its AEs vis-à-vis non-AEs, but such lower prices are invariably conjoined with much higher number of units sold. In certain cases, the assessee charged its AEs at prices higher than that charged from non-AEs for similar products. The ld. AR explained that though the products are similar but these were customized as per the requirements of the non-AEs, which position has not been controverted on behalf of the Revenue. That apart, it is seen that there is difference in locations of AEs and non-AEs. Whereas the biggest buyer AE, namely, Power Tools Distribution N.V. is situated in Belgium; the biggest buyer non-AEs, namely, Bogala Graphite Lanka Ltd. is situated in Sri Lanka. 8. Rule 10B(2) of the Income-tax Rules, 1962 (hereinafter also called `the Rules') provides that the comparability of an international transaction with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k difference and functional difference. Reverting to facts of the extant case, we find that since there are significant differences in the sales made by the assessee to its AEs and non-AEs, the effect of which has neither been given by the TPO nor it has been shown that how it can be given, we hold that the action of the authorities below in applying the CUP as the most appropriate method cannot be countenanced. 10. Having held that the CUP is not the most appropriate method in the given circumstances, there is a need to determine the ALP of the international transaction under another suitable method. The ld. AR vehemently argued that in such a scenario of the Tribunal not approving the application of the CUP method by the authorities, the ALP determination by the assessee under the TNMM would revive not calling for any transfer pricing addition. This contention in our considered opinion is sans merit. We have noticed above that the assessee aggregated three international transactions including payment of Royalty and the instant transaction of Export of manufactured finished goods and processed them under the TNMM on aggregate basis. Thus the operating profit computed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unity of hearing in such fresh proceedings." 16. The same view was followed by the Tribunal in assessee's own case for assessment year 2006-07 in ITA No.1470/PUN/2010 dated 21.08.2019 wherein on the issue, the Tribunal has held and observed as follows: "11. The first ground is with regard to the "sales to Associated Enterprises (AEs)". 12. It was contended by the Ld. AR of the assessee that during the year total sales to AEs was at Rs. 61.38 Crores, out of which Rs. 54.10 Crores is not disputed. It is Rs. 7.28 Crores which is the disputed amount. The Ld. AR invited our attention to the TPO's order at Page 15 for assessment year 2006-07 read with TPO's order at Page 8 for assessment year 2005-06 and demonstrated that the subject matter and facts for both these assessment years are similar. It is seen that sales to AEs is always more. At Page 661 onwards Volume-I of the Paper book, the entire details of sales have been placed before us. The Ld. AR further contended that for assessment year 2005-06, the Tribunal in assessee's own case (supra.) in detailed has determined this issue restoring the matter to the file of the AO/TPO for deciding it afresh giving certain directions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed as not pressed. 20. Ground No.3 pertains to the disallowance u/s.14A of the Income Tax Act, 1961 (hereinafter referred to as "the Act') of Rs. 36,30,760/-. 21. The brief facts on this issue are that the Assessing Officer has made disallowance of Rs. 40,80,379/- u/s.14A r.w.r.8D comprising of interest expenses of Rs. 32,92,953/- and disallowance under rule 8D @0.5% of the average investment yielding exempt income. The Ld. CIT(Appeals) observed vide Para 2.8.1 to 2.8.10, Page 36 to 42 of his order that the company has not furnished any evidence that the investments have been made out of short term surplus funds available with them. The Ld. CIT(Appeals) further observed that the assessee has to incur some expenditure to keep track of tax free income. Therefore, the Ld. CIT(Appeals) confirmed the disallowance made by the Assessing officer and restricted the same to Rs. 36,30,760/- by observing that disallowance u/s.14A cannot exceed the amount of exempt income. 22. At the time of hearing, the Ld. Counsel for the assessee invited our attention at Page 8 of the paper book compilation wherein the company has own funds of Rs. 493.14 crores and Page 18 of the paper book compilation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .14A of the Act is called for." 23. Therefore, out of the total disallowance of Rs. 40,80,379/- made by the Assessing Officer u/s.14A r.w.r.8D, the disallowance in respect of interest expenditure of Rs. 32,92,953/- is, therefore, deleted following the aforesaid order of the Tribunal in assessee's own case and placing reliance on the decision of the Hon'ble Jurisdictional High Court (supra.). That however, on disallowance of Rs. 7,87,426/- under rule 8D @ 0.5% of the average investment yielding exempt income towards administrative expenses, the view of the Tribunal at Para 7.2 of its order in ITA No.1311 & 1414/PUN/2011 for the assessment year 2002-03 has been as follows: "7.2 With regard to the disallowance on administrative expenses, considering the entirety of facts and circumstances in the case of the assessee, we direct the Assessing Officer to sustain ½ % of the disallowance on administrative expenses attributable to exempt income. In view of our above findings on this issue, we set aside the order of the Ld. CIT(Appeals) and partly allow this ground. Hence, ground No.1 raised in appeal by the assessee is partly allowed." That respectfully following our decision f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing, the Ld. Counsel for the assessee invited our attention to Page 7 of the paper book compilation wherein the company has owned funds of Rs. 649.23 crores and page 18 of the paper book compilation reflecting an investment as on March 31, 2010 of Rs. Nil and that as on March 31, 2011 of Rs. 32 Crores and therefore, the assessee's own funds exceeds the investments made and the borrowings. Further, the Ld. Counsel for the assessee submitted that the disallowance towards administrative expenses being 0.5% of investment yielding exempt income is excessive. Since facts and issue raised in this ground are identical to Ground No.3 in ITA No.1356/PUN/2015 for the assessment year 2010-11, therefore, our decision rendered in ITA No.1356/PUN/2015 shall mutatis mutandis apply for this ground also. Thus, Ground No.3 raised in this appeal is partly allowed.
30. In the result, appeal of the assessee in ITA No.816/PUN/2017 for the assessment year 2011-12 is partly allowed for statistical purposes.
31. In the combined result, both the appeals of the assessee are partly allowed for statistical purposes.
Order pronounced on 25th day of February, 2021. X X X X Extracts X X X X X X X X Extracts X X X X
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