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TMI Blog2021 (3) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... position that the bench marking of international transactions have to be made under any one of the recognized methods prescribed in the I.T. Rules. Apparently, the Ld. DRP has adopted CUP method for bench marking the international transactions. However, it has not brought on record any external supporting material to substantiate the mark-up rate of 10%. We have noticed earlier that the Ld DRP has arrived at the rate of 10% on the basis of the internal profits declared by the assessee. What is required to be shown is that under same set of facts, what would have been the mark-up if the transactions were between unrelated parties. Accordingly, we are of the view that the determination of rate of markup requires fresh examination. Accordingly, we modify the order passed by Ld. DRP on the issue determination of percentage of markup and restore the same to the file of the A.O./TPO for examining it afresh. After affording adequate opportunity of being heard to the assessee, the AO/TPO may take appropriate decision in accordance with law. Disallowance of Research Development expenses incurred by the assessee - HELD THAT:- From the details of expenditure furnished by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranting of full credit of foreign tax credit - HELD THAT:- A.O. has not given any reasons as to why he has restricted the foreign tax credit to ₹ 3.89 crores as against ₹ 5.43 crores claimed by the assessee. The Ld. A.R. has submitted that issue relating to foreign tax credit has been explained well in the case of Ittiam Systems Pvt. Ltd. by the Bangalore bench of Tribunal. Accordingly, we are of the view that the claim of the assessee requires fresh examination at the end of the A.O. Accordingly, we restore this issue to the file of the A.O. with the direction to follow the principles laid down by the Bangalore bench in the case of Ittiam Systems Pvt. Ltd. and accordingly, allow credit of foreign tax credit. Short credit of TDS - HELD THAT:- It is the claim of the assessee that the A.O. has not granted credit of TDS . Since this matter requires factual verification, we restore this issue to the file of the A.O. Direction given by the Ld. DRP to the A.O. to consider FMV as on 1.4.1981 for computing capital gain - HELD THAT:- As find that the facts regarding treatment of shade trees as capital assets is squarely covered by the decision of the Hon'ble juris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly, the assessee mentioned the above said amount as Refund of Advance . Accordingly, it was submitted that the above said receipt does not have any impact on the Profit and Loss account and hence no bench marking is required. However, the assessee changed the version before TPO and claimed that the above said amount is Reimbursement of Expenses . 5.2 It was submitted that the assessee intended to acquire a company named OOO Sunty Limited, Russia. In that process, it has incurred expenses on carrying due-diligence exercises to the extent of ₹ 9,44,00,714/-. The above said expenses were incurred by the assessee from March, 2007 to August, 2009. However, due to certain business reasons, the above said acquisition of OOO Sunty Limited was shelved. We notice that the assessee has titled this transaction as Project Kremlin . Subsequently, the AE of the assessee M/s Campestress Holdings Ltd acquired the above said company OOO Sunty Limited . Hence the assessee raised a debit note dated 31st August, 2009 upon M/s Campestress Holdings Ltd (CHL) for a sum of ₹ 9,44,00,714/-, being pre-acquisition expenses incurred by the assessee on due diligence exercises. It appears th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, the Ld DRP directed the TPO to determine the mark-up @ 10% and accordingly issued the direction. The observations made by Ld DRP are extracted below:- 4.3 The tax payer's objections as above have been examined along with the facts of the case. The fact that the tax payer had misrepresented the nature of transaction in the 3CEB report as refund of an advance and later, when the TPO called for details, categorized its nature as reimbursement of expense is not in dispute. From the sequence of events it is clear that when the impugned expenses were being incurred by the tax payer from March,2007 to August, 2009 in pursuit of its intended acquisition of the Russian company it was incurring the expenditure on its own since CHL then was not on the scene in the context of this acquisition. CHL did not even have an agreement or understanding with the tax payer then that this stage of work/activities would be carried out by the tax payer and the subsequent stages taken over by the CHL. Once the group decision was taken for the project to the acquired by CHL and not Tata Coffee Ltd., the subsequent activities became the responsibility of CIIL. However, the expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same would represent services performed by the assessee to CHL. Accordingly, the Ld. D.R. submitted that the Ld. DRP was justified in estimating the markup at 10% of the investment made by the assessee. 5.7 We heard rival contentions on this issue and perused the record. Admittedly, the assessee has spent ₹ 9.44 crores from March, 2007 to August, 2009 in connection with proposition of acquisition of OOO Sunty Limited, Russia, which was titled as Project Kremline . Subsequently, on account of change in strategy by Tata Group, the above said M/s. OOO Sunty Limited, Russia was acquired by another A.E. now M/s. Campestress Holdings Ltd. Hence, the assessee raised a debit note of ₹ 9.44 crores on 31.8.2009 upon M/s. Campestress Holdings Limited requiring reimbursement of the expenditure incurred by the assessee on due diligence (pre-acquisition) exercises towards acquisition of M/s. OOO Sunty Limited, Russia. 5.8 The assessee has claimed that it is a case of mere reimbursement of expenses. We have earlier noticed that the assessee has initially claimed same as refund of advance and later changed its version as reimbursement of expenses. Since the assessee had ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder passed by Ld. DRP on the issue determination of percentage of markup and restore the same to the file of the A.O./TPO for examining it afresh. After affording adequate opportunity of being heard to the assessee, the AO/TPO may take appropriate decision in accordance with law. 6. The next issue relates to disallowance of Research Development expenses incurred by the assessee. The A.O. noticed that assessee has claimed a sum of ₹ 42.95 lakhs towards Research Development expenses. The details of the said expenses have been tabulated by Ld. DRP as under: Particulars Amount (Rs.) Salaries, Wages Bonus-R D 2,650,408 Contribution to P F/Other Fund. R D 122,392 'Workmen Staff Welfare Expenses-R D 5,211 -Consumption Of Stores Spares- R D Expns 516,846 Power Fuel-R D 387,269 Repairs To Bldgs-Wages-R D 57,847 Repairs To Buildings -Stores-R D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the A.O. 6.2 The Ld. A.R submitted that the assessee has been incurring expenditure on research development activities in a routine manner year after year and it has not developed any copy right as presumed by the A.O. He further submitted that the capital expenditure incurred in connection with the R D activities have been duly capitalized by the assessee and details of the same have been reported in the annual report of the assessee. He submitted that revenue expenses have been charged to profit and loss account. He further submitted that major portion of the R D expenses is the expenditure incurred on salaries wages paid to its staff. He submitted that the assessee is constrained to maintain R D department in the normal course in order to meet the competition and to remain upto date with the changes in the market. Accordingly, the Ld. A.R. submitted that there is no justification for treating this expenditure as capital in nature. 6.3 On the contrary, the Ld. D.R. submitted that the assessee has not been able to substantiate before the A.O. that it has obtained approval from DSIR, Govt. of India. The assessee also failed to establish that this expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e past out of own surplus funds and hence, there is no requirement of making any disallowance out of interest expenses. Hence, the ITAT, vide its order dated 6.9.2013 passed in ITA No.1462 to 1464/Bang/2012, has restored the matter to the file of the A.O. for examining the issue afresh. The Ld. A.R. submitted that the A.O. has since passed the order giving effect to the order passed by the Tribunal and he did not make any disallowance out of interest expenditure. The Ld. A.R. submitted that the facts are identical in the instant case and accordingly, prayed that the matter may be restored to the file of the A.O. with similar directions. 7.1 The Ld. D.R. on the contrary, submitted that the assessee has not demonstrated that the investments have been made out of surplus funds in the past. Further, the assessee is maintaining its accounts in a consolidated manner, whereby all funds and receipts are intermingled in a common pool. Hence, it will be difficult to relate the investment to a particular receipt. Accordingly, the Ld. D.R. submitted that the A.O. was justified in making disallowance out of interest expenses under rule 8D(2)(ii). 7.2 We heard the parties on this issue and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax credit has been explained well in the case of Ittiam Systems Pvt. Ltd. by the Bangalore bench of Tribunal. Accordingly, we are of the view that the claim of the assessee requires fresh examination at the end of the A.O. Accordingly, we restore this issue to the file of the A.O. with the direction to follow the principles laid down by the Bangalore bench in the case of Ittiam Systems Pvt. Ltd. and accordingly, allow credit of foreign tax credit. 9. Next issue relates to short credit of TDS. It is the claim of the assessee that the A.O. has not granted credit of TDS to the tune of ₹ 8,22,566/-. Since this matter requires factual verification, we restore this issue to the file of the A.O. 10. We shall now take up the appeal filed by the revenue, wherein the revenue is contesting the direction given by the Ld. DRP to the A.O. to consider FMV as on 1.4.1981 for computing capital gain. 10.1 The facts relating to the above issue are stated in brief. During the year under consideration, the assessee had sold Rosewood, Silver Oak, Eucalyptus and other trees. The assessee computed capital gain on sale of Rosewood Silver Oak after considering indexed cost of acquisition by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its timber division was claimed to be incidental to Its coffee plantation business. 8.4 It was submitted that sale of rosewood to government depot and transfer of silver oak and other trees to Timber division is shown as sale of capital asset and offered to tax as capital gains. Further, sale of marine plywood, fire retardant plywood, phenol formaldehyde black board, commercial plywood produced in timber division are shown as business income. It was submitted that the reason for the different treatment is the difference in characterization of the item of sale i.e., trees. As regards Rosewood, Eucalyptus and other trees which are used for shade of coffee bushes are in the nature of capital assets and hence, income/loss from their sale is computed under the head Capital gains once the income is recognized in the books of the company based on its accounting As regards, Silver Oak the income is computed under the head Capital gains upon their conversion into stock in trade of timber value addition division. The subsequent sale in the timber division is of the stock in trade of the business of the timber division and hence, income from their sale is computed under the h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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