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TMI Blog2021 (9) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... ne by comparing the prices charged to by A.E. which is controlled transaction, as the provisions of I.T. Act, mandates that the determination of ALP has to be done by comparison between controlled and un-controlled transactions. An identical issue has been dealt in the case of PCIT Vs. Audco India Limited [ 2019 (5) TMI 694 - BOMBAY HIGH COURT] on identical facts had confirmed the decision of Tribunal by dismissing the appeal filed by the Revenue by holding that TPO has to arrive at ALP of the transaction only comparing it with uncontrolled transactions and the Hon'ble High Court had found fault with the approach of the TPO by holding that it is contrary to the clear provisions of the Act as per Rule 10A(d) of the Rules. ALP adjustment on account of receipt of commission for Marketing Services - main contention of the appellant is that the functions undertaken by the assessee for selling the product is significantly different from what is undertaken for the purpose of earning the commission income from A.E and profit earned from independent activity of marketing function cannot be compared with the integrated marketing function of a fully integrated manufacturer - HELD TH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) is in total ignorance of the provisions of Explanation 1 of Sec.32 of the Act held it to be revenue in nature. The decision relied upon by the learned counsel has no application after insertion of Explanation 1 of Sec.32 of the Act. In the above circumstances, we reverse the order of ld.CIT(A) and restore the issue in this ground to the file of Assessing Officer. Thus, this ground of the Revenue is allowed for statistical purposes. Addition of miscellaneous expenses - assessee could not produce supporting documents, details, vouchers - HELD THAT:- During the course of assessment proceedings, the respondent / assessee company could not furnish the evidence, bills, vouchers etc to the extent of ₹ 2,59,407/- out of the total Miscellaneous Expenditure. On appeal before ld.CIT(A), ld.CIT(A) restricted the disallowance to ₹ 1,00,000/- which is in accordance with the decision of his order in assessee s own case for the earlier assessment years. On the principle of consistency, we uphold the order of ld.CIT(A). Accordingly, this ground of appeal stands dismissed. Allowance of commission expenditure - HELD THAT:- CIT(A) following the decision of his order in ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses was not discharged by the assessee inspite of opportunity allowed by the A.O and also when in fact the CIT(A) has not given a finding on the genuineness of the claim? 4. Whether on the facts and circumstances of the case, the CIT(A) was justified in allowing expenditure incurred on account of repair and maintenance for which no documentary evidence was produced of ₹ 96,776/-, when in fact the CIT(A) has not given a finding on the genuineness of the claim? 5. Whether on the facts and circumstances of the case, the CIT(A) was justified in restricting the addition made out of miscellaneous expenditure of ₹ 2,59,407/- to ₹ 1 lac on adhoc basis, when the onus to prove the genuineness of the expenses was not discharged by the assessee inspite of opportunity allowed by the A.O and also when no finding on the genuineness of the claim has been brought out by the CIT(A)? 6. Whether on the facts and circumstances of the case, the CIT(A) was justified in allowing commission expenses of ₹ 3,96,0335/- even when assessee failed to discharge its onus in submitting evidences called for by the AO when the law specifically requires such onus to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75,17,625 TNMM 4 Import of Capital goods 87,61,495 5 Payment of Royalty 6,41,38,716 TNMM 6 Receipt of sales commission 34,30,50,057 TNMM 7 Payment of commission 1,33,97,434 TNMM 8 Payment of consultancy fees 20,45,414 TNMM 9 Payment of management fees 1,89,14,290 TNMM 10 Provision of administrative support services 4,91,75,419 TNMM 11 Provision of IT enabled design engineering services 32,58,75,250 TNMM 12 Recovery of warranty expenses 3,00,54,240 TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23 crores. c) Sale of products to A.E. at ₹ 47,00,000/- Finally, the assessment was completed by the Assessing Officer at a total income of ₹ 171,64,57,875/- u/s 143(3) r.w.s. 144C(3) of the Act on 26.05.2014 after making following disallowances : (a) Software development expenses at ₹ 1,26,000/- (b) Expenses on repairs and maintenance at ₹ 96,776/- (c) Other miscellaneous expenses at ₹ 2,59,407/- (d) Commission payment at ₹ 39,60,335/- (e) Disallowance u/s 14A of the Act at ₹ 7,87,426/- (f) T.P. Adjustment. 5. Being aggrieved by the assessment order, an appeal was preferred by the respondent / assessee before the ld.CIT(A), who vide impugned order deleted the T.P. Adjustment on account of payment of royalty at ₹ 3,62,00,000/- following his order in respondent / assessee s own case for the earlier assessment years i.e., A.Y. 2008-09 and 2009-10. Similarly, as regards to the T.P. adjustment on account of receipt of commission payment of ₹ 7.23 crores, the ld.CIT(A) following his order in respondent / assessee s own case for the earlier assessment years for A.Y. 2008-09 and 2009-10 dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of payment of royalty separately under CUP method. The respondent / assessee company also accepted this. 9. The TPO computed the ALP adjustment in respect of the payment of royalty by adopting royalty paid by other group company i.e., Wuxi-Atlas Copco Compressor Co. Ltd., which paid the royalty at 3% on the net sales price. The TPO considered it as a comparable transaction and held that ALP of the royalty is determined at 3% of the domestic sales and 8% of the export sales and the balance of which is determined at ₹ 2.97 crores. Consequently the difference between the actual payment of ₹ 6.41 crores and ALP of ₹ 2.79 lac being ₹ 3.62 lac was suggested as TP adjustment on account of royalty payment. 10. On appeal before the ld.CIT(A), the ld.CIT(A) deleted the addition by holding that the methodology adopted by the TPO in comparing the controlled transaction with another controlled transaction is flawed by placing reliance on his order in assessee s own case for the earlier A.Ys. 2008-09 and 2009-10. 11. Before us, the ld.CIT DR had vehemently contested that the ld.CIT(A) ought not have granted relief to respondent / assessee on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrolled and un-controlled transactions. An identical issue has been dealt by the Hon ble Bombay High Court in the case of PCIT Vs. Audco India Limited reported in (2019) 104 taxmann.com 386 (Bom) wherein the Hon'ble High Court on identical facts had confirmed the decision of Tribunal by dismissing the appeal filed by the Revenue by holding that TPO has to arrive at ALP of the transaction only comparing it with uncontrolled transactions and the Hon'ble High Court had found fault with the approach of the TPO by holding that it is contrary to the clear provisions of the Act as per Rule 10A(d) of the Rules. Hon ble Bombay High Court dismissed the appeal of Revenue on the following question of law by holding as under : (d) We note that Chapter X of the Act is a special provision relating to avoidance of tax. Section 92 deals with computation of income from international transaction having regard to ALP. It provides any income arising from the international transaction shall be computed having regard to the ALP. The ALP is defined under Section 92F(ii) of the Act to mean a price which is applied or proposed to be applied in transactions between persons other than AE& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esired, and communicates the same to the concerned AE It should be noted that ACIL 's involvement is restricted to providing the AEs with the lead and in providing routine administrative support whenever required ACIL does not conclude contracts on behalf of the AEs, nor does it hold any inventory of products on behalf of the AEs, The consideration due to ACIL is mutually agreed between ACIL and the transacting AE, and generally depends on the size of the order procured as well as the price which the AE is able to negotiate with the customer, The consideration due to ACIL is mutually agreed between ACIL and the transacting AE, and generally depends on the size of the order procured as well as the price which the AE is able [Q negotiate with the customer. The appellant received commission of ₹ 34.52 crores for rendering the indenting / marketing services to its A.E. The respondent / assessee applied the TNMM method in respect of this international transactions and sought to justify the transaction of receipt of commission is at ALP by applying the TNMM separately. There is no dispute as to the computation of the total profit arrived at ₹ 143.54 crores attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. The issue in this ground of appeal relates to the determination of ALP in respect of the transaction of receipt of commission. The main contention of the appellant is that the functions undertaken by the assessee for selling the product is significantly different from what is undertaken for the purpose of earning the commission income from A.E. The profit earned from independent activity of marketing function cannot be compared with the integrated marketing function of a fully integrated manufacturer. But the TPO had aggregated both the functions, however proceeded to benchmark the marketing function separately. We need not examine propriety of aggregating both the functions as the respondent / assessee is not objecting the same. The only bone of contention between the Department and the assessee is exclusion of the cost of material consumed and the depreciation of the total cost for the purpose of determining the percentage of marketing cost to the total cost. The reasoning given by the TPO that these two segments of the cost does not contribute to profit and does not stand to any reason, in as much as the depreciation and the material actually contributes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO does not fall into any of the appropriate methods prescribed under Rule 10(b) of the I.T. Rules, 1962. We must also mention that clause (f) of clause (1) of Rule 10(b) prescribing any other method was inserted with retrospective effect from 01.04.2013 is not applicable for the year under consideration. Therefore, the ratio of the jurisdictional Bombay High Court in the case of CIT Vs. Kodak India (P) Ltd., reported in (2017) 79 taxmann.com 362 (Bombay) is applicable in the present set of facts. In the case of CIT Vs. Kodak India (P) Ltd. (supra), the Hon ble Bombay High Court has held as under : 10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under Section 92C of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92C(1)(f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereon and the balance of ₹ 1,26,000/- was disallowed by the Assessing Officer. 24. On appeal, the Ld.CIT(A) deleted the addition by holding that there is no customized software. Mere up-gradation of the software does not result in any enduring benefit when the life of software is less than two years and placing reliance on the decisions of CIT Vs. Southern Roadway Ltd. (2008) 304 ITR 84 (Mad), CIT Vs. Asashi India Safety Glass Ltd (2011) 203 Taxman 277 and CIT Vs. Renuga Textiles Mills Ltd (2012) 254 CTR (Mad) 423, had deleted the addition. 25. Being aggrieved by the order of Ld.CIT(A), the Revenue is in appeal before us. 26. Before us, the Ld. CIT DR placed reliance on the order of Assessing Officer. 27. On the other hand, the learned counsel for the respondent / assessee submitted that the expenditure was incurred only as up-gradation of software and in view of the fast changes in technology, it cannot be said that there is enduring benefit accrued to the assessee. He also placed reliance on the decisions of this Tribunal in assessee s own case for A.Y. 2001-02 and the jurisdictional Bombay High Court in the case of CIT Vs. Geoffrey Manners Co., Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, the expenditure cannot held to be revenue in nature. 33. On the other hand, the learned counsel for the assessee submitted that no new asset came into existence as a result of this expenditure and the expenditure incurred is only revenue in nature and Explanation 1 to Sec.32(1) was inserted by the Finance Act has no application to the expenditure as it was incurred only on revenue items like painting, flooring etc. 34. We have heard the rival submissions and perused the material on record. The issue in the present ground of appeal relates to the allowability of expenditure incurred on items like painting and flooring etc on the rented premises which are used for the business purpose of the assessee. The provisions of Explanation 1 to Sec.32(1) of the Act reads as under : Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extensio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in question. This being a fact which had been settled, cannot be re-examined on the basis of the specious argument advanced. 17. A further examination of the facts of the case shows that the Assessees have actually put up substantial construction of enduring benefit and also renovated the building for the purpose of their business. Explanation 1 to Section 32(1) is as follows:- [Explanation 1.- Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. 18. This Explanation had been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 01.04.1988. The Judgement heavily relied on by the learned counsel for the Assessees, namely, Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fact an outlay for the purpose of earning profits or, in other words for the purpose of better business. It was not an expense which was of a recurring nature, and therefore, it can be safely said that the lessee brought into being an asset of an enduring nature. Undoubtedly, it was an improvement. The wooden chairs were replaced. No evidence had been led to show that the wooden chairs had been useless and could not be used for seating the cinema-goers. On the other hand, the stand taken was that the whole object was to modernise the cinema house to bring it in line with the modern show business. The replacement was an improvement of an enduring nature and not mere replacement. Capital expense with regard to a short-term venture, such as a lease for a period, had to be viewed in the context of that lease, namely, its purpose coupled with its duration. Expenditure incurred by the assessee is an expenditure of a capital nature and it brought into being an advantage of an enduring nature and thus it had been rightly treated as such by the Tribunal, except to the extent of the amount found by the Tribunal being on account of repairs. 20. In view of the above propositions, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Explanation 1 of Sec.32 of the Act. In the above circumstances, we reverse the order of ld.CIT(A) and restore the issue in this ground to the file of Assessing Officer. Thus, this ground of the Revenue is allowed for statistical purposes. 37. In ground No.5, the Revenue challenges the decision of ld.CIT(A) restricting the disallowance of the minimum expenditure from ₹ 2,59,407/- to ₹ 1,00,000/-. The brief factual matrix of the issue in ground No.5 is as under : During the course of assessment proceedings, the Assessing Officer found that out of the miscellaneous expenses, the assessee could not produce supporting documents, details, vouchers to the extent of ₹ 2,59,407/-, therefore disallowed the same. 38. On appeal before ld.CIT(A), ld.CIT(A) following his order in assessee s own case in the earlier years in A.Ys. 2008-09 and 2009-10, restricted the disallowance to ₹ 1,00,000/-. 39. Being aggrieved by the order of ld.CIT(A), the Revenue is in appeal before us. 40. Before us, the learned CIT DR vehemently contested that there is no basis to restrict the disallowance to ₹ 1,00,000/-. 41. On the other hand, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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