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TMI Blog2022 (7) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... lf. The notification r.w section 11B of IDRA only talks of cost of Plant and Machinery as originally incurred. Once these costs are admittedly incurred for Plant and Machinery there is no scope for excluding them. Considering our finding above of inclusion of computers cost, patterns, fixtures and factory equipment and product development and preoperative cost, this alone makes the assessee ineligible to SSI status as per IDRA Act and it can be safely held accordingly therefore that the assessee is not eligible to deduction u/s 80IB of the Act. However we shall deal with the remaining exclusions also With respect to the remaining items disqualified ,we agree with the findings of the DRP that having not discharged its onus of physically verifying its claim of excluding these items as qualifying as Tools ,Jigs and Dyes ,that too on its own request and the financial records of the assessee belying this claim, the said claim also needed to be rejected. The Ld.Counsel for the assessee has been unable to controvert that as per its own financial statements the assessee had separately classified assets qualifying as Tools Jigs to the extent of only Rs.5,15,136/-.The act of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We find that the Hon ble High Courts have categorically held in the said decisions that it is not part of the TPO s jurisdiction to consider whether or not expenditure incurred passed the test u/s 37(1) of the Act. It has been held that the only authority of the TPO is to conduct a Transfer Pricing analysis to determine ALP and not to determine whether there is a service or not from which assessee benefits. Determination of the ALP of the Royalty transaction at Nil by the AO is held to be not in accordance with law. The adjustment therefore made to the income of the assessee is therefore directed to be deleted. TP adjustment made to the cost of the purchases made by the assessee from its associated enterprise - only contention of the assessee before us was that it had objected to the adoption of the PBIT of the assessee company @7.03% pointing out that none of the data as regards revenue or cost were matching with the profit and loss account of the assessee and had submitted summary of the financial information also to the ACIT TPO-2 - HELD THAT:- As this issue of arm s length price of the purchase transaction entered into by the assessee with its associate enterprise is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, since there was a solitary issue in the remaining appeals which was common and identical to that raised in Assessment Year 2006-07, relating to transfer pricing adjustment made on account of determination of the arm s length price of the International Transaction of payment of royalty by the assessee to its Associate Enterprise. It was pointed out that the disallowance was made for identical reasons, in the background of identical facts and circumstances. The ld. D.R. fairly agreed with the same. Therefore, all the appeals were taken up together for hearing with the appeal of the assessee for A.Y. 2006-07 being treated as the lead case. The decision rendered in the ground which is common to the other appeals also will apply mutatis mutandis to the other appeals. 3. ITA No. 2948/Ahd/2010 (A.Y.2006-07) (Assessees Appeal) 4. Ground No.1 6, it was stated were general in nature. The same are therefore not being dealt with by us. 5. Ground no. 2 reads as under: The Learned Dispute Resolution Panel, Ahmedabad, has erred in not allowing deduction U/s 80IB of the I.T. Act, 1961 for Rs. 1,06,13,472/-though fully explained. The addition made be deleted. 6. The iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery ,being the total cost debited under the head Plant and Machinery by the assessee as per its Books of accounts during the relevant year, amounted to Rs.3,74,00,831/- and the investment in the block of computers was reflected at Rs. 1,24,84,568/-. As per the Revenue, the total of the two i.e. Rs. 4,98,85,399/- was the investment in Plant and Machinery by the assessee for the purposes of determining its SSI Status as per the notification issued under the IDR Act, which exceeding the limit of investment in plant and machinery specified therein of Rs. 1 crore, the assessee did not qualify as an SSI unit and was therefore not eligible to claim exemption u/s. 80IB of the Act. As per the assessee however out of its total investment in Plant and Machinery of Rs. 3.74 crores, only investment of Rs. 46,47,971/- qualified as plant and machinery since the rest being Moulds, Dies, Jigs, Fixtures, Tools etc. were to be excluded as per the notification itself. The calculation submitted by the assessee of its investment in Plant and Machinery as per the IDR Act r.w. the notification issued under it is as under: Total cost debited under head Plant and Machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention of the ld. Counsel for the assessee before us in support of its claim that its investments in Plant and Machinery was well within the limits specified under the IDR Act for qualifying as an SSI Unit, as under: This issue was in dispute right from the first year when the positive claim for deduction u/s 80IB of the Act made by the assessee i.e. A.Y. 2003-04 for identical reasons that the Tools, Jigs ,Dies and Moulds excluded by the assessee ought to have been included as per the Revenue for the purposes of determining its investment plant and machinery. That the matter went up to the Tribunal where the issue was decided in favour of the assessee holding that the exclusion by the assessee of Tools, Jigs, Dies and Moulds was in accordance with the Notification issued by the IDR Act itself and therefore was correct. That in subsequent year also, i.e A.Y 2004-05, the dispute arose and the ITAT following its order in the preceding year allowed the assessee s claim. That in A.Y. 2005-06 again the claim was not allowed by the A.O. but was allowed in first appeal by the ld. CIT(A). 12. In this regard, our attention was drawn to the order of the ITAT in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vehicles and computers and held that value of plant and machinery exceeded Rs.1 crore Since clause(i) 2(b) specifically excludes cost of tools jigs dies moulds and spare parts for maintenance and the cost of consumables stores, the A.O. is not justified in not excluding the same while determining the value of plant and machinery. In our opinion, the word maintenance is suffixed to only spare parts and not to the other items such as tools jigs dies and moulds as also consumables. Accordingly, the A.O. is directed to exclude the cost of equipment such as tools jigs dies moulds and spare parts for maintenance and the cost of consumables stores while determining value of plant and machinery in order to ascertain the status of industrial undertaking of the taxpayer. 13. Our attention was also drawn to the order of the ITAT in the case of the assessee for A.Y. 2004-05 in ITA No. 79/Ahd/2008 dated 10/02/2012 placed before us at paper book page no. 118 to 135, particularly to page no. 124, para 8, wherein following the order of the ITAT in the preceding year, the claim of the assessee was allowed. 14. As for the Revenue s contention of inclusion of computers as plant and machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. It was pointed out that this fact was taken note of the DRP also in the proceedings for the impugned year before it. 16. The Ld. D.R. on the other hand contended that these contentions had been made by the assessee before the DRP also wherein the comments of the A.O. was invited to the same who contended that the assessee had actually stripped his main machine into different components and thereafter only accounted for the main body as its Plant and Machinery and rest of the items as Mould, Dies, Tools, Jigs and Fixtures, which was contrary to the intention of the language in the definition of the SSI unit as per IDR Act, to include a machine as a whole and not exclude moulds and jigs which were integral part of the machinery, and further that the verification of computers as per the direction of the ITAT in A.Y. 2003-04 was carried out by an Inspector who was illiterate in computer skill. Ld.DR pointed out that on the AO stating so, the assessee itself requested before the DRP for fresh verification to be carried out by a literate team, which was carried out and the report submitted did not help the cause of the assessee at all, since the computers and its software wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for manufacturing of machines. The various inventory management functions such as allocation of material, requisition for production, issue of inventory, production planning, and so on are done with the help of ERP software. The quality control functions are also fully supported by ERP software. A snap shot of all these ERP functions has been taken and was enclosed with the report. This clearly shows that the assessee is using software in it's manufacturing process and related hardware are accordingly attributable to the production process undertaken by the assessee. . . . . 5.12 (v) In the light of above said provision of the Act, the argument of the assessee is examined as under: During the course of its submission over inventory management, the assessee has submitted that its production and management of production including inventory data is managed a specialized inventory software. Since inventory is closely integrated with manufacturing, production without this software is not possible computer along with the inventory software valued at Rs. 1 ,17,64,388/- which therefore form an integral part of plant and machinery, have not boon stated to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place and constitute the main assembly equipment s. Under no circumstances, they can be treated as tools for maintenance. [iii] Similarly, there are equipment s like injection mould, the value of one piece of which is Rs.4,25,000/- (as per bill dated 30.06.199? of Precise Metal Works, Ahmedabad ). These injection moulds ore very necessary for the purpose of various crates, trays and other finished products in which the assessee is dealing in. they can never be treated as maintenance equipments. 5.15 without prejudice to above, it is observed that before us the assessee has submitted the details of exclusion of plant and machinery as per Government of India s notification no. SO-857(E) dated 10.12.1999 issued under Industrial (Development and Regulation) Act, 1951 as under: Total cost debited under head Plant and Machinery Original cost Original cost 3,74,00.831 Less: Items excluded in terms of Para b (i) of Notification no. SO 857 dated 10/12/1999 Mould 78,02,436 Dies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded, separately, the value of Mould at Rs. 78,02,436/-, Dies at Rs. 23,75,327/-, Jig at Rs. 17,24,908/-, Tools at Rs. 75,90,447/- and consumables at Rs. 1,01,359/-. Hence it is held that the value of Patterns at Rs. 33,18,178/-, Fixtures at Rs. 7,04,134/- and Factory equipment being racks, tables, pallets are required to be included in the value of plant and machinery for determining the status of SSI Unit. 5.17. Further the assessee has also excluded Development cost incurred to develop source of raw material which were capitalized to plant and machinery as product development cost at Rs. 5,65,960/- and Pre-operative revenue expenses capitalized at Rs. 14,71,865/-. We are of the view that these expenses cannot be excluded from the value of Plant Machinery as the assessee is claiming depreciation on same. The value of plant and machinery cannot be different for claiming depreciation and for determining the status of assessee as a SSI. 18. Having heard both the parties and considering all the contentions made before us and the different documents relied upon, we hold that we do not find any merit in the contention of the ld. Counsel for the assessee that its investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moulds but was part of its plant and machinery . If those assets were actually in the nature of tools ,jigs and dyes alone and not part of Plant and Machinery, the assessee would have reflected it separately and claimed a different and higher rate of depreciation on the same as prescribed under the Companies Act. Therefore this claim of the assessee of segregating tools, jigs dyes and moulds originally its included in the value of plant and machinery as reflected in its books of accounts, as per Notification issued under the IDR Act, in our view is not correct. This is not clearly permissible and only assets which actually qualified as tools, jigs dyes and moulds for the purposes of different rate of depreciation as already done by the assessee in its Books needed to be treated as to be in the said nature for exclusion. Our findings as above are further cemented by the fact that when on its own request in proceedings before the DRP an Inspector was deputed to verify the existence of these very tools, jigs dyes and moulds which the assessee had sought to exclude from its plant and machinery value,the assessee offered no cooperation in the matter and provided no assistance and failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that it was only an IMMS software used only for purposes of day to day store accounting, was a perpetual inventory software and had nothing to do with manufacturing process. 20. As far as the AutoCad software is concerned, we find, even the assessee does not deny its usage in the manufacturing process. Therefore, the cost of the software alongwith the hardware in which it is used is to be treated as Plant and Machinery for the purposes of SSI status determination. The argument of the assessee that only cost of software be considered as Plant and Machinery ,is highly illogical and merits no consideration. It is common knowledge that software alone is of no use and has utility only when run on the hardware. Therefore both the cost of software and hardware, we hold, used for running Auto Cad software is to be treated as Plant and Machinery. 21. Regarding the IMMS /ERP software the AO vide his letter dated 07-07- 2010 has vehemently made out a case for treating it as Plant and Machinery stating that these softwares are utilized for the purpose of handling all activities of the assessee enterprise including manufacturing, inventory management, time scheduling, ordering of items, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res being used as held by us above in respect of Auto Cad software. Thus we hold that the inclusion in Plant and Machinery of investments in computers to the tune of Rs.1,24,84,568/- was rightly made by the AO/DRP. The investment in computers exceeding Rs. 1 Cr this inclusion in the Plant and Machinery of the assessee itself makes the assessee ineligible to claim the status of SSI . However we shall proceed to deal with the exclusion of other items also from Plant and Machinery by the assessee of Mould, dyes ,Jigs and Tools etc .in accordance with the IDRA notification. The DRP has completely rejected the bifurcation of the assessee regarding its Plant and Machinery amounting to only Rs.46,47,971 out of that shown under the head Plant and Machinery in the Books of Rs.3,74,00,831/- and based it on the following reasoning: a) the assessee failed to discharge its onus of physically verifying its claim of assets qualifying as Plant and Machinery which verification was directed by the DRP on the request of the assessee itself. The DRP contended that the assessee himself requesting for physical verification could not then have taken a U turn and stated that after a lapse of so many ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputers cost, patterns, fixtures and factory equipment and product development and preoperative cost, this alone makes the assessee ineligible to SSI status as per IDRA Act and it can be safely held accordingly therefore that the assessee is not eligible to deduction u/s 80IB of the Act. However we shall deal with the remaining exclusions also 23. With respect to the remaining items disqualified ,we agree with the findings of the DRP that having not discharged its onus of physically verifying its claim of excluding these items as qualifying as Tools ,Jigs and Dyes ,that too on its own request and the financial records of the assessee belying this claim, the said claim also needed to be rejected. The Ld.Counsel for the assessee has been unable to controvert that as per its own financial statements the assessee had separately classified assets qualifying as Tools Jigs to the extent of only Rs.5,15,136/-.The act of the assessee therefore of splitting the admitted cost of Plant and Machinery of Rs.3,74,00,831 /-,we agree with the DRP, was only breaking down its machine to its components ,reducing the machine in turn to only its frame which surely does not qualify as Plant and Mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged the aforesaid determination of ALP of royalty at nil raising multifarious arguments. Briefly summarized his arguments were to the effect (i) identical adjustment made in the case of the assessee in the preceding assessment year i.e. A.Y. 2004-05 in ITA No. 79/Ahd/2009 dated 10/02/2012 was rejected by the ITAT and the Revenues Misc. Application against the same dismissed in M.A. No. 74/Ahd/2012 dated 27/09/2013 . Copies of both the orders were placed before us. That there was no change in the facts and circumstances as in the A. Y. 2004-05 and therefore the decision of the ITAT in the said year squarely applied the present case. Reliance was placed on the following decision in support of its contention. a) PCIT-4, Pune vs Vishay Components (P) Ltd. Components Pvt. Ltd. vs. [2019] 103 taxmann.com 421. (ii) That without prejudice to the above, the TNMM method had been wrongly rejected since the assessee had adopted this method from year to year to justify the ALP of its transaction. iii) Once TNMM method is accepted at entity level, no separate bench marking needs to be done in relation to payment of royalty. Reliance in this regard was placed on the following decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee could earn in such type of business and the expenditure having been incurred for the purpose of business could not be denied completely. The relevant findings of the ITAT at para 17 of the order are as under: 17. On hearing the parties and perusing the materials available on record, we are of the view that for a transaction to come u/s 92 of the Act, it is necessary to establish that the course of business between resident and non- resident is so arranged that the business transacted between them provides to the resident either (i) no profits or (ii) less than ordinary profits which might be expected to arise in the business. In the present case, the assessee had declared income and therefore it is not case of no profit . So as regards the adequacy of profits vis- -vis ordinary profits which might be expected to arise in the business, the same can be found out only, when exercise is done to compare the income of the assessee with other comparable enterprises in India. In the present case, the TPO observed that no royalty was charged by other group entites and accordingly the Arms Length Price for royalty charges was inferred as nil. The AO accordingly disallowed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the TPO s jurisdiction to consider whether or not expenditure incurred passed the test u/s 37(1) of the Act. It has been held that the only authority of the TPO is to conduct a Transfer Pricing analysis to determine ALP and not to determine whether there is a service or not from which assessee benefits. 32. In view of the above the determination of the ALP of the Royalty transaction at Nil by the AO is held to be not in accordance with law. The adjustment therefore made to the income of the assessee amounting to Rs.1,37,75,772/- is therefore directed to be deleted. 33. The other issue raised in the ground relates to the transfer pricing adjustment made to the cost of the purchases made by the assessee from its associated enterprise. The TPO had proposed an upward adjustment on account of purchase payment of Rs. 21,99,689/- accepting TNMM adopted by the assessee as most appropriate method for determining the arm s length price and the Profit Level Indicator (PLI) of PBDIT (Profit Before Depreciation Interest and Tax) to sales. The adjustment was made observing that the comparable of M/s. Praj Industries, acomparable, showed PBDIT to sales of 12.83% as against 10.88% shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of Deduction u/s 80IB of the I.T. Act, 1961. 38. In the impugned ground the assessee has challenged the denial of deduction u/s. 80IB to the service income earned by the assessee. The quantum of service income earned and credited to the profit and loss account and on which deduction u/80IB of the Act was claimed amounted to Rs. 3,72,52,132/. The A.O./DRP denied the same noting that it could not be said to be derived from the industrial undertaking which was the essential prerequisite for claiming deduction under the said section. Accordingly 30% of the service income was treated as the amount of deduction claimed by the assessee on the same, without allowing any benefit of set off of expenses against the said income and deduction denied to the same which came to Rs. 1,11,75,639/- but was restricted to the amount of Rs. 1,06,13,472/- being the entire claim of the assessee to deduction u/s. 80IB of the Act. This denial of deduction was made without prejudice to the denial of claim of the assessee to deduction u/s. 80IB of the Act on account of the finding by the revenue authorities that the assessee did not classify as SSI unit to be eligible to claim the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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