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TMI Blog2022 (3) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... . This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm s length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. Transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee. Adoption of PLI - HELD THAT:- We direct the TPO to adopt PLI as OP/Sales. The TPO is directed to compute the ALP in accordance with the directions contained in this order, after affording opportunity of being heard to the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... ought to be considered as the appropriate profit level indicator with respect to the auto components manufacturing segment, in accordance to the order of the Hon'ble ITAT in the Appellant's own case for AY 2010-11, as the facts and circumstances of the Appellant remain the same. 15. On the facts and in the circumstances of the case and in law, the Deputy Commissioner of Income-tax, Circle 4(1)(1), Bangalore ('Learned AO') / Hon'ble Dispute Resolution Panel (`lIon'ble DRP) erred in not allowing deduction under the provisions of the Income Tax Act, 1961, on account of Education Cess and Secondary and Higher Education Cess paid by the Appellant on the assessed income alongwith income-tax and surcharge for the year under appeal. It is prayed that the deduction of Education Cess and Secondary and Higher Education Cess should be allowed to the Appellant as business expenditure under the provisions of the Act. 4. Besides the aforesaid grounds which are in relation to determination of ALP in respect of an international transaction, the assessee has raised corporate grounds also and these grounds read as follows: Other than Transfer Pricing 11. On the facts and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted the plea of the assessee and directed that the PLI should be adopted as OP/Sales. The following were the relevant observations of the Tribunal in this regard: "5.5.In principle, we ate in agreement with the contentions raised by assessee, as GP over sales can eliminate the difference in claim of depreciation due to age of machinery, rate at which it was claimed and method of claims like straight line or written down value. We accordingly direct the AO/TPO to adopt the comparison of profitability ratios adopting GP over sales. Since the details of capacity utilization of the comparable companies and rate of depreciation could not be analysed as commented by DRP, it would be better if GP analysis was undertaken taking sales less cost of raw material as basis (excluding other cost including Depreciation, interest etc) so that auto components profitability could be analysed so as to consider whether the import of raw material from AE has effected the profitability of assessee under their provisions. Accordingly, we set aside the impugned orders of the Revenue 'authorities on this issue and restore the matter to the file of AO/TPO to carry out the exercise as stated above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any reason for rejecting PLI used by the assessee in the TP documentation. The second objection was with regard to the margin computed by the TPO of the two comparables company being: 1. Hindoostan Mills Ltd 2. Laxmi Machine Works Ltd. 13. The Ld. DRP however erred in adjudicating upon a wrong comparable as opposed to the contention raised by the assessee in the grounds of appeal. The Ld. DRP gave findings in relation to: 1. Laxmi Machine Works Ltd 2. Veejay Lakshmi Engineering Works Ltd. 14. Thus the DRP failed to adjudicate upon "Hindoostan Mills Ltd" been taken as a comparable company which was the plea raised by the assessee. 15. It is pertinent to mention that the assessee never raised any objection in relation to Veejay Lakshmi Engineering works being taken as a comparable on which the Ld. DRP has adjudicated upon. Thus, the Ld. DRP erred in not adjudicating upon the actual ground raised by the assessee and instead gave findings on the wrong comparable company. This issue was also raised via a Rectification petition filed by the assessee u/s 154 of the Act. On 03.12.2015 which remains uncomplied with. 16. We are of the view that the grievance of the assessee wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act were applicable. It is also not in dispute that the income tax payable on the total income as computed under the Act in respect of the previous year relevant to AY 2007-08 was less than 10% of its book profits and therefore book profit should be deemed to be the total income of the assessee and tax payable by the assessee on such total income shall be 10% of such total income. Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). In so preparing its book of accounts including profit and loss account, the company shall adopt the same accounting policies, accounting stand and method and rates for calculating depreciation as is adopted while preparing its accounts that are laid before the company at its annual general meeting in accordance with provisions of Sec.210 of the Companies Act. Explanation below Sec.115JB of the Act provides that for the purposes of section 115JB of the Act, "book profit" means the net profit as shown in the profit and loss account for the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the comparables selected by the TPO in the fresh search it conducted is still to be taken as the final set of comparables, the assessee submitted that the margin be recomputed in the light of assessee's submissions. The final outcome of the said recomputation would result in: Comparable Company Recomputed Margins Hindoostan Mills Ltd. 7.27 Lakshmi Machine Works 8.35 Veejay Laxmi Engineering Works Ltd. 8.51 Mean 8.04 25. Thus the arithmetic mean operating profit margin of comparable companies being 8.04 would still be within +/- 5% of the operating profit margin of 5.65% of the assessee company during the year under consideration. 26. As far as the additional ground raised by the assessee is concerned, the same is in relation to the issue whether education cess can be allowed as a deduction under section 37(1) of the Act or has to be disallowed under section 40(a)(ii) of the Act. The additional ground of appeal being a legal ground is admitted for adjudication. ITAT Kolkata Bench in the case of Kanoria Chemicals & Industries Ltd. Vs Addl. CIT (ITAT Kolkata) Appeal Number ITA No. 2184/Kol/2018 Order dated 26/10/2021, dealt with identical additional ground as raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t further litigation on this account may be avoided.{Board's F . No.91/5B/66-ITJ(19), dated 18-5-1967. 18. The Learned Counsel for the assessee in this respect has further relied upon the decision of the Hon'ble Bombay High Court in the case of "Sesa Goa Limited Vs. JCIT" (2020) 117 taxmann.com 96 and further on the decision of the Hon'ble Rajasthan High Court in the case of "Chambal Fertilizers & Chemicals Ltd Vs. JCIT": D.B Income-tax Appeal No. 52/2018 decided on 31-07-2018, wherein, the Hon'ble High Court/s relied upon the aforesaid CBDT Circular Dt. 18-05-1967(supra) and in view of the interpretation made by the CBDT have held that 'education cess' can be claimed as an allowable deduction while computing the income chargeable under the heads of profits and gains of business or profession. The Learned Counsel has further relied upon the following decisions of the Co-ordinate Benches of this Tribunal, who have followed the aforesaid judgments of the Hon'ble High Courts: a. Decision of Kolkata Bench of the Tribunal in the case of DCIT Vs. ITC Infotech India Ltd, ITA No. 67/Kol/2015 dt. 23-10-2019 b. Decision of Kolkata Bench of the Tribunal in the case of Tega Industries Ltd Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge." 22. The provisions of the Finance Act 2011 relevant to the Assessment Year under consideration i.e. 2012-13 are also relevant. For the sake of ready reference, the same is reproduced hereunder:- 2(11) The amount of income-tax as specified in sub-sections (1) to (10) and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be further increased by an additional surcharge for purposes of the Union, to be called the "Education Cess on income-tax", calculated at the rate of two per cent. of such incometax and surcharge, so as to fulfil the commitment of the Government to provide and finance universalised quality basic education. 23. A perusal of the aforesaid provisions of the Finance Act 2004 and Finance Act 2011 would show that it has been specifically provided that 'education cess' is an additional surcharge levied on the income-tax. Therefore, in the light of the decision of the Hon'ble Supreme Court in the case of "CIT Vs. K. Srinivasan" (supra) the additional surcharge is part of the income-tax. The aforesaid decision of the Hon'ble Apex Court and the provisions of Finance Act, 2004 and the relevant provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n actuary and amounts computed as per actuarial valuation of does not make it provision for an unascertained or contingent liability. The assessee has submitted copies of actuarial valuation reports pertaining to Long Services Award it the submissions to the TPO as well as CIT(A). The said provision is capable of being estimated with reasonable certainty thereby making it ascertained and not unascertained. The following judicial pronouncements support the plea of the assessee in this regard : (i) Stanley Black & Decker India Limited Vs DCIT-3(1) Mumbai (2017 (11) TMI 1147)-ITAT Mumbai (ii) DCIT -11, Bangalore Vs M/s L & T Valdel Engineering P Ltd 2015 (6) TMI 984-ITAT Bangalore. (iii) DCIT, Circle-11(1), New Delhi Vs Eicher Motors Ltd 2017(2)TMI 795 (iv) DCIT, CC-18, New Delhi vs Brentwoods Vs. International Ltd 2017 (9) TMI 474 - ITAT Delhi (v) DCIT Vs Pragati Glass Works P Ltd 2017(5) TMI. 30. In the light of the judicial pronouncements referred to above, we are of the view that the provision for bonus as well as provision for long term service are both ascertained liability and cannot be added to book profit under section 115JB of the Act. We hold and direct accordingly. 31. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the adjustments need to be restricted to the cost relating to the imports of material from the AE. Similar issue arose in the case of assessee itself for AY 2006-2007 before ITAT. In its decision dated 14/11/2014 in IT(TP)A No. 1401/Bang/2007, ITAT directed the assessing officer to confine the adjustments qua the purchases made by the assessee from AE. In the year under consideration also the calculation of adjustment u/s 92CA has been done without excluding the non AE purchases. So the AO/TPO is directed to recalculate the adjustment to be made by excluding the non AE transactions done by the assessee. So the objection of the assessee is decided in above terms." 34. Even otherwise, the law is well settled that the addition by way of determination of ALP can be made only in respect of the international transaction and not to the entire segment that might include transactions with non-AE. The above proposition is also supported by the following decisions of the Hon'ble Bombay High Court in the case of Phoenix Mecano (India) Private Limited [ITA No. 1182 of 2014], had to deal with the following question of law suggested by the revenue:- 6.1 Whether on the facts and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed does not give rise to any substantial question of law. Thus not entertained." 36. The ITAT Bangalore in the case of Kirloskar Toyota Textile Machinery Pvt. Ltd. v. ACIT [IT(TP)A No.1401/Bang/2010 held as that the determination of ALP has to be restricted qua the purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE. 37. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm's length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE ..... X X X X Extracts X X X X X X X X Extracts X X X X
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