9911796707
TMI Blog2017 (6) TMI 1346X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on software expenses held as capital in the earlier years. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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. CIT(A) was justified in directing that software application of Rs. 60,98,995/- be treated as revenue expenditure, by merely relying on assessee's submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation 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. Vs. DCIT & Anr. (2010) 328 ITR 81 (Bom) 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 decided as indicated above. 11. The issue in ground of appeal No.3 raised by the assessee is against the disallowance of Excise duty of Rs. 60,000/- on obsolete stock. 12. The learned Authorized Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, wherein no scrap was added to the closing stock of each of the year. 20. The learned Departmental Representative for the Revenue relied on the orders of Assessing Officer and CIT(A). 21. We have hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er:- 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 TPO noted that in the said segment i.e. manufacturing of wires, there was export sale to the associated enterprises and there were domestic sales and therefore, the split function results in respect of domestic sales and export sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 assessee at Rs. 6,25,621/-. The learned Authorized Representative for the assessee objected to the use of CUP method and also pointed out how CUP method had to be applied. He also pointed out that the activities undertaken by the assessee wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Further in assessment year 2008-09, the addition was made in the hands of assessee by rejecting TNNM method and the aggregation approach, but the appeal of assessee was quashed by the Tribunal on technical aspects. The second plea raised by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 facts of the current year are different from the fact in A.Ys. 2004-05 and 2005-06 as in those years the TNMM was adopted by the assesse for determining the ALP which has been accepted as a most appropriate method by the TPO without any ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 of bad debts, no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 TNMM adopted by the assessee to determine the arm's length price (ALP). We thus hold that the addition made by the learned TPO as a result of incorrect application of CPM is not justified. It is pertinent to note that in the succeeding asst. yr. 2007-08, the assessee has ado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 disposed of as indicated above. 36. Further, the next segment in which addition has been made in the hands of assessee is Export of Seamless tubes and pipes of Rs. 12,04,814/-. The learned Authorized Representative for the assessee pointed out that under the said division, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod 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 the plea of assessee on all counts and upheld the addition of Rs. 12,05,814/-. 40. The first aspect of the issue raised is whether aggregation approach is to be applied in order to benchmark the arm's length price of international transactions. The said aggregation approach has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal 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 reference to pages 36 and 37 of the said order. 45. We have heard the rival contentions and perused the record. Briefly, in the facts relating to the issue are that the assessee had paid management service fees of Rs. 4,41,44,973/- to Sandvik AB Sweden, based on the terms of agreement entered into between the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 Sweden acted as conduit. The cost incurred in providing the services by the providing parties were collected and pooled at Sandvik AB level and further recharged as per the terms of agreement to the recipient Sandvik group entities. 48. The next plea of the TPO in rejecting the claim was that the assessee had not derived any ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement 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 find on perusal of the additional evidence that the management services were actually rendered by the AE. As mentioned above, the learned TPO in remand report also not doubted that the management services were not rendered at all. The learned TPO has stated that management services were rendered but were rendered by the group entiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 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 reverse the findings of the TPO in this regard as the same are without any basis, in view of specific covenants of the agreement entered into by the assessee with Sandvik AB, Sweden. 51. The second point which has been considered by the CIT(A) is that the said management service fees have been taxed in the hands of recipient Sandvik AB, Sweden. Where the Assessing Officer Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(A) allowed the claim of the assessee, in view of the appellate order relating to assessment year 2002-03. 33. The Revenue is in appeal against the order of CIT(A). 34. We find that similar issue of disallowance of software expenses being of enduring nature, arose before the Tribunal in assessee's own case in ITA Nos.2053 & 2054/PN/2012 in Revenue's appeal against the assessee. The Tribunal vide o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 learned Authorized Representative for the assessee in this regard also pointed out that the said issue is also covered by the order of Tribunal in Revenue's appeal filed for assessment year 2004-05. 61. We find that similar issue arose before the Tribunal in assessment year 2004-05 and the Tribunal vide paras 36 to 43 deliberated upon the issue. The findings of Tribunal are as under:- "43. We have heard the rival contentions and perused the record. The assessee was consistently followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Vs. 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 issues, considered the reason to believe recorded by the Assessing Officer with regard to set off of loss incurred by unit eligible for deduction u/s. 10B of the Act. The Assessing Officer had reopened the assessment on the surmise that since the income of the Crab Stick Unit was exempted from tax under section 10B, the loss of that unit was wrongly set off against the normal business income. The Hon'ble High Court noted that after the substitution of section 10B of the Act by the Finance Act of 2000, the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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