9911796707
TMI Blog2021 (2) TMI 1329X X X X Extracts X X X X X X X X Extracts X X X X ..... ss- appeals for A.Y. 2009-10. The assessee has assailed the impugned order on the following grounds of appeal before us: "Ground No.1: 1. On the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in disallowing a sum of Rs.26,92,193 under Section 14A of the Income Tax Act, 1961 ('the Act') having failed to appreciate that the Appellant company has not incurred any expense directly in relation to the earning of tax free income. The Appellant prays that the sum of Rs.26,92,193 be allowed as business expenditure and the disallowance may kindly be deleted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in computing the disallowance as per the method prescribed under Rule 8D(2)(ii) of the Income Tax Rules, 1962 ('the Rules') without considering the specific facts in the Appellant's case. The Appellant prays that disallowance of proportionate interest expenditure under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules kindly be deleted. 3. Without prejudice to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the Appellant and its AE and thereby erred in contending that the AE ought to compensate the Appellant towards the alleged excessive AMP spend; iv. presuming without any direct or indirect evidence that the Appellant had incurred non-routine AMP expenses and that the AMP expenses incurred by the Appellant benefited the AE; and v. confirming the adjustment despite the fact that the advertisements were product specific and not brand specific and disregarding the fact that many of the products manufactured by the Appellant were India specific. The Appellant therefore prays that appropriate relief be granted. 2. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in considering third party market research expenses and manufacturing standard costs, being in the nature of selling & distribution expenses, for computing the alleged excessive AMP spend of the Appellant. The Appellant therefore prays that appropriate relief be granted. 3. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. Accordingly, the Appellant prays that the addition of Rs. 61,55,480 may kindly be deleted. Ground No 6: 1. Without prejudice to Ground No. 1 to 5 above and in the alternative, on the facts and in circumstances of the case, the learned AO, under the directions issued by the DRP, has erred in consequently not revising the profit from the Baddi unit eligible for deduction under Section 80IC of the Act by the amount of Advertising, Marketing and Promotion expenditure alleged to have not been incurred for the purpose of business of Appellant's undertaking. The Appellant prays that the learned AO be directed to recompute the deduction under Section 8oIC of the Act by adjusting the Advertising and Marketing expenditure considered as not having been incurred for the purpose of business of Appellant's undertaking. The Appellant craves leave to add to, omit or alter all or any of the above Grounds of appeal before or during the hearing of aforesaid matter." On the other hand the revenue has challenged the impugned order on the following grounds: "1. Whether on the facts and in the circumstances of the case and in law, the Dispute Resolution Panel erred in holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company under the normal provisions at Rs.232,59,02,620/- and the "book profit' under Sec. 115JB at Rs.335,27,33,202/-. 5. Aggrieved, the assessee assailed the additions/disallowances that were proposed by the A.O vide his draft assessment order before the Dispute Resolution Panel-1, Mumbai (for short 'DRP'). After deliberating on the issues that were raised before him in the backdrop of the contentions advanced by the assessee, the DRP issued directions vide its order passed under Sec. 144C(5), dated 31.10.2013. 6. The A.O after receiving the order passed by the DRP under Sec. 144C(5), dated 31.10.2013, therein framed the assessment under Sec. 143(3) r.w.s 144C(13), dated 30.12.2013 wherein he inter alia made the following additions/disallowances: Sr. No. Particulars Amount 1. Disallowance under Sec. 14A Rs. 26,92,193/- 2 Transfer Pricing Adjustment under Sec.92CA(4) Rs.31,63,26,783/- 3. Addition of unexplained expenses Rs. 6,87,976/- 4. Restriction of the assessee's claim for Rs.251,92,58,451/- deduction under Sec. 80IC (as against deduction under Sec. 80IC of Rs.252,09,87,377/- claimed by the assessee in its return of income) After making t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to the disallowance made by the A.O under Sec. 14A r.w Rule 8D(2)(iii), it was submitted by the ld. A.R that the A.O while computing the said disallowance had wrongly included the investments which though had not yielded any exempt income during the year under consideration. In support of his aforesaid contention the ld. A.R relied on the order of the ITAT special bench in the case of ACIT & Anr. Vs. Vireet Investment Pvt. Ltd. (2017) 165 ITD 27 (Del)(SB). In the backdrop of his aforesaid contentions, it was submitted by the ld. A.R that the A.O be directed to re-compute the disallowance under Rule 8D(2)(iii) after excluding the investments which had not yielded any exempt income during the year in question. 10. Per contra, the ld. Departmental Representative (for short 'D.R') relied on the orders of the lower authorities. 11. We have deliberated at length on the aforesaid issue in the backdrop of the contentions advanced by the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record as well as considered the judicial pronouncements that have been pressed into service by them to drive home their re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Bank 3. George Joseph No.79/8C Sunny Brooks NXT to Wipro Corporation, office Sajapur Road, Bangalore 56 3,99,249 American Express Bank On being queried as regards the expenditure stated to have been incurred by Mr. George Joseph, it was the claim of the assessee that the same pertained to travel, hotel and food expenses of the aforesaid person who was rendering his services as the sales manager of the assessee company. However, as the assessee failed to produce any details, data or supporting primary records, the A.O, thus, vide his draft assessment order proposed to disallow the aforesaid expenditure aggregating to Rs.6,87,976/-. Objections filed by the assessee to the proposed disallowance of the aforesaid expenses by the A.O with the DRP, however, did not find favour with the panel. Being of the view that not only the assessee had failed to substantiate the expenses of Rs.6.88 lacs (approx) in toto, but even otherwise the documentary evidence which was filed as 'additional evidence' before it did not instil much of confidence, the DRP upheld the addition/disallowance of the aforesaid expenses and also declined to entertain the documents which were purportedly filed be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lower authorities. Although, we are not oblivious of the fact that the assessee could not substantiate that the expenses in question were incurred wholly and exclusively for the purpose of its business, but then, we also cannot shut our eyes to the fact that the documentary evidence produced by the assessee before the DRP were considered by the panel with a half hearted approach. On the one hand the panel had declined to admit the documents produced by the assessee as 'additional evidence', while for at the same time it had given general observations as regards the same. Be that as it may, in our considered view the matter in all fairness requires to be restored to the file of the A.O for fresh adjudication. Needless to say, the A.O shall in the course of the 'set aside' proceedings afford a reasonable opportunity of being heard to the assessee who shall remain at a liberty to substantiate its aforesaid claim on the basis of fresh documentary evidence. The Ground of appeal No 2 is allowed for statistical purposes. 16. We shall now take up the grievance of the assessee that the A.O/DRP had erred in including only 75% of the income from scrap sales while quantifying its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprise from an eligible business therein contemplated was to be allowed as a deduction while computing the total income of the assessee. It was averred by the ld. A.R that as the generation and the consequential sale of scrap pursuant to the manufacturing activity of the industrial undertaking was inextricably linked or in fact interwoven with the manufacturing activities of the assessee, the same, thus, was undeniably formed part of the profit and gains derived by the industrial undertaking from its eligible business. In order to buttress his aforesaid claim the ld. A.R had relied on the judgment of the Hon'ble High Court of Allahabad in the case of CIT & Anr. Vs. Modi Xerox Ltd. (2014) 365 ITR 200 (All). 18. Per contra, the ld. D.R relied on the orders of the lower authorities. 19. We have given a thoughtful consideration to the aforesaid issue and find substantial force in the contention advanced by Mr. Pardiwala, the ld. Senior counsel. On a perusal of Sec. 80IC of the Act, we find that the same therein contemplates deduction of any profit and gains derived by an undertaking or an enterprise from an eligible business, while computing the total income of the assessee. The con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the industrial undertaking. The assessee's case is that income of Rs. 63,66,932/- was deducted treating to be income from other sources and deduction under Section 80-HH was not given on the aforesaid amount of Rs. 63,66,932/-. The assessee filed appeal against the said order and the Appellate Authority in Paragraph No. 6.2 directed the Assessing Officer to take the income from the sale of Scrap by xerographic equipment unit and Toner, Developer, Photocopier unit as profit of the said unit. The said order has been confirmed by the Tribunal. Learned counsel for the appellant submitted that the Assessing Officer has rightly not deducted the said income from the profits and gain from the industrial unit, since the said income from the Scrap could not be said to be income derived from the industrial undertaking. He submits that the word 'derived from' in Section 80- HH has to be understood as something which has direct and immediate nexus with the assessee's industrial undertaking. Learned counsel for the assessee refuting the submission of the appellant submitted that the Scrap was generated from the manufacturing process itself by different units of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of Scrap by xerographic equipment Unit and Toner, Developer, Photocopier Unit as profit of the said Units (and not income from other sources) for purpose of deduction u/s 80HH. However, as I have held in the case of the appellant in previous asst. year that the income/profit derived by the appellant by service and trading Unit does not constitute income from Industrial Undertaking, other income of Rs. 29,28,427 (out of claim of Rs. 83,66,932) concerning this unit has to be reduced from the above said net assessable income taken by the A.O." The Commissioner has clearly directed for including the income from the Scrap generated by specified units as noted above. The Scrap generated from the above units has to be treated as Scrap derived from the industrial undertaking and any income from the sale of the said Scrap has to be included for the purpose of benefit of Section 80-HH. The Hon'ble Apex Court in Pandian Chemicals Ltd. Vs. Commissioner of Income Tax reported in 262 ITR 278 (SC) have occasion to consider the word 'derived from' as used in Section 80-HH. The said case was of interest earned on the deposit made with the Electricity Board for supply of electri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." The proposition laid down by the Hon'ble Apex Court that the said case was to the effect that the word derived from under Section 80- HH has to be understood as something which has immediate nexus with the industrial undertaking. In the present case, the scrap generated from the aforesaid three units has direct and immediate nexus with the industrial undertaking since the said scrap has been generated from the manufacturing process itself. Thus, we are of the view that the Commissioner as well as the Tribunal has committed no error in allowing the benefit of Section 80-HH to the assessee on the aforesaid income of Rs. 63 lakhs and odd." Accordingly, in terms of our aforesaid observations we are unable to persuade ourselves to subscribe to the view taken by the lower authorities, and thus, direct the A.O to include the entire amount of scrap sales in the eligible profits of the assessee for the purpose of quantifying its claim for deduction under Sec. 80IC of the Act. The Ground of appeal No. 3 is allowed. 20. We shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "A. Net Sales : Rs.1694,81,35,000/- B. Advertising & Sales Promotion : Rs. 271,71,68,000/- C. Advertisement, Marketing & Promotion (AMP) Expenses as a percentage of Sales (B/Ax 100%) : 16.03%" In the backdrop of his aforesaid deliberations, the TPO was of the view that the assessee was supposed to be reimbursed the aforesaid AMP expenses that were incurred by it on behalf of its AE, viz. Colgate-Palmolive, USA, along with a mark up of 15% on the said expenditure. Backed by his aforesaid deliberations, the TPO worked out the Arm's Length Price of the AMP expenditure at Rs.156,55,14,780/-, as under: "Determination of arm's length price of re-imbursement, for brand promotion and marketing intangible of the AE in India. Net Sales of the taxpayer = Rs.1694,81,35,000/- Arm's length % of AMP Expenditure = 8% Arm's length AMP Expenditure = 8% of Rs.1694,81,35,000/- = Rs.135,58,50,800/- Expenditure incurred by the tax payer on AMP = Rs.271,71,68,000/- Expenditure incurred for developing the Intan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Per contra, the ld. D.R relied on the orders of the lower authorities. 25. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. On a perusal of the order passed by the Tribunal while disposing off the assessee's appeal for A.Y. 2005-06 and A.Y. 2007-08 in ITA No. 6073/Mum/2014 and ITA No. 2778/Mum/2011, respectively, we find, that the Tribunal had struck down the TP adjustment that was made w.r.t AMP expenditure, observing as under: "5.1 We have carefully heard the rival contentions and perused relevant material on record. At the outset, some pertinent facts to be noted are that there exists no arrangement or agreement between the assessee and its AE which obliged the assessee to undertake any sort of brand building on behalf of its AE. Secondly, nothing has been brought on record to suggest that incurring of AMP expenditure has, in any manner, resulted into brand building exercise or creating marketing intangibles for the AE or AE stood benefitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrued to the parent company J&J US but the cost thereof is not apportioned to the parent company. The TPO sought explanation from the assessee as to why the cost of arrangement as emanating from the records, is resulting into the benefit to the parent AE, but not apportioned as per section 92(2) of the Act. The TPO stated that the assessee and the parent company J&J US should have shared sales promotion expenses in the ratio of royalty to sales or would have renegotiated a lower royalty rate. The assessee filed its reply stating inter-alia that assessee is engaged in the business of distributing the products in the Indian Market on its own account. It was also contended that the advertisement and marketing expenses are incurred in India only for promoting sales by assessee of its products in India and it is not in any way benefited to J&J US. That J&J US is not directly involved in the business of manufacturing or trading of said goods in India either of its own or through any of its subsidiary. Hence, the entire advertisement and marketing expenses incurred are purely for assessee's own benefit and there is no element of any service being rendered to J&J US. It was also sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kodak India (P.) Ltd. v. Addl. CIT [2013] 37 taxmann.com 233 and submitted that the Tribunal deleted similar kind of adjustment suggested by TPO on the ground that TPO cannot make a disallowance which is not within the precinct of specific method prescribed under section 92C(1) of the Act. He submitted that no adhoc disallowance can be made under the Transfer Pricing provisions. 39. On the other hand, ld. DR supported the order of AO/TPO and submitted that to consider marketing expenses the cost plus method could be applied. Since TPO has not followed any specific method as 2006-07 is the first year, the matter could be restored to TPO to decide it afresh after considering the guidelines laid down by Special Bench (Delhi) in the case of L.G. Electronics India (P.) Ltd. v. Asstt. CIT [2013]140 ITD 41/29 taxmann.com 300. He submitted that the AE, parent company of the assessee should reimburse the expenses as assessee company has created brand in India which is owned by parent company by incurring the expenditure. 40. We have considered the order of the TPO/AO and the submissions of ld. Representatives of the parties. We observe that the TPO has suggested disallowance on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal allowed the Respondent- Assessee's appeal before it by deleting the addition of Rs.200.82 lakhs being the transfer pricing adjustment on account of sales promotion and publicity expenses being payable by the Respondent- Assessee' parent M/s. Johnson & Johnson, USA. This on the ground that the Transfer Pricing Officer (TPO) has, while holding that the parent company should share this expenditure on publicity and sales promotion as it benefits therefrom, as higher sales result in higher royalty, has not determined the Arms Length Price (ALP) by following any of the methods prescribed under Section 92C(1) of the Act read with Rule 10B of the Income Tax Rules, 1962. (ii) The TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act. In this case, there is nothing on record to indicate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of Rs.200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent, M/s. Johns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlpool of India Ltd.) and many of the points urged by the counsel in these appeals have been considered in these two judgments. 53. A reading of the heading of Chapter X ["Computation of income from international transactions having regard to arm's length price"] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C (1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 58. In Maruti Suzuki India Ltd. (supra) one of the submissions of the Revenue was: "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being." 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT. ....... 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, we upheld the order of Ld. first appellate authority and dismiss this ground of revenue's appeal. The assessee's cross-objections become infructuous." As the facts and the issue involved in the present appeal before us remains the same as were there before the Tribunal in the aforementioned years in the assessee's own case, we, thus, finding no reason to take a different view and adopting a consistent approach therein respectfully follow the same. Accordingly, in terms of our aforesaid observations we herein vacate the TP adjustment of Rs.31,63,26,783/- made by the A.O/TPO w.r.t the AMP expenditure. The Ground of appeal No. 4 is allowed in terms of our aforesaid observations. 26. We shall now take up the grievance of the assessee that the A.O had erred in making an adjustment of Rs.61,55,480/- in respect of provision of research and developing/testing services. It was, however, submitted by the ld. A.R that pursuant to the directions of the DRP as the A.O vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 30.12.2013 had restricted the addition under Sec. 92CA(4) to an amount of Rs.31,63,26,783/-, and no addition in context of the aforesaid issue was therein mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e directions issued by the DRP, erred in computing the disallowance as per the method prescribed under Rule 8D(a)(ii) of the Income Tax Rules, 1962 ('the Rules') without considering the specific facts in the Appellant's case. The Appellant prays that disallowance of proportionate interest expenditure under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules kindly be deleted. 3. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in not considering the alternative computation of disallowance under Section 14A of the Act submitted by the Appellant without providing justification for rejecting Appellant's claim. The Appellant prays that the alternative computation of disallowance under Section 14A of the Act provided by the Appellant to be considered for disallowance under Section 14A of the Act. Ground No 2; 1. On the facts and in the circumstances of the case and in law, the learned AO, under the issued by the DRP, has erred in excluding 25% of the income from Scrap Sales from profit of the business of the industrial undertaking while computing de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch expenses, Vol/incentive, Instore support cost and manufacturing standard costs, being in the nature of selling & distribution expenses, for computing the alleged excessive AMP spend of the Appellant. The Appellant therefore prays that appropriate relief be granted. 3. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO, under the directions issued by the DRP, erred in i. applying bright line method to determine the alleged excessive AMP spend without appreciating that no such method has been prescribed under the Act and Rules; ii. concluding that the AMP expenses of the Appellant, which is incurred by way of payment to the third parties, as an international transaction; iii. arbitrarily selecting comparables for bright line method without following a structured search process; iv. comparing the AMP expense ratio of the Appellant with AMP expense ratio of the comparable companies engaged in varied segments of FMCG sector i.e. not similar to the Appellant (oral care segment) and concluding that the excess is non-routine AMP spend; v. arbitrarily excluding a part of the AMP expenses of comparables ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Appellant craves leave to add to, omit or alter all or any of the above Grounds of appeal before or during the hearing of aforesaid matter." On the other hand the revenue has assailed the order of the CIT(A) on the basis of the following grounds raised before us: "1. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing the TPO to verify the working given by the assessee which is erroneous, since the amounts quoted in the annual reports of the comparable companies under the head selling and distribution expenses are not necessarily representative of such expenses only, and may have an element of AMP expenses to it. 2. On the facts and in the circumstances of the cast and in law, the Hon'ble DRP erred by not upholding the TPO's ratio method to exclude the selling and distribution expenses while working out the AMP spend of the comparables which is more scientific and logical approach in the absence of actual selling and distribution expenses available before the TPO. 3. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at Rs. 284,10,52,360/- and 'book profit' under Sec. 115JB at Rs.487,58,27,806/-. 35. The assessee being aggrieved with the assessment order passed by the A.O under Sec. 143(3) r.w.s. 144C(13) of the Act, dated 30.01.2015 has carried the matter in appeal before us. As multiple issues are involved in the captioned appeal, we shall, therefore, take up the same in a chronological manner, as under: 36. Disallowance under Sec. 14A : Rs.14,39,636/-: As is discernible from the records, we find, that the assessee during the year had earned tax free interest income of Rs. 87,92,021/-. Observing that the assessee had not attributed any part of the expenditure for earning of the aforesaid exempt income, the A.O, therein worked out the same at an amount of Rs.14,39,636/-, as under: Summary of total disallowances Relevant Rule Amount 8D(2)(i) -- 8D(2)(ii) Rs. 7,41,207 8D(2)(iii) Rs. 6,98,430 Total Rs. 14,39,636 37. At the time of hearing of the appeal before us, the ld. A.R reiterated his contentions as regards the aforesaid disallowance made by the A.O under Sec. 14A r.w. Rule 8D, as were advanced by him in context of the said issue in its appeal for the imme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the assessee for the purpose of computing its entitlement for deduction under Sec. 80IC of the Act; and (ii). that the A.O/DRP had erred in excluding the foreign exchange gain on raw/packing material (Rs.1,55,34,162/-) while quantifying the assessee's entitlement for deduction u/s 80IC. 41. As is discernible from the orders of the lower authorities, we find, that the A.O in the course of the assessment proceedings observed that the assessee while computing its claim for deduction u/s 80IC had inter alia included in its eligible profits viz. (i) sale of scrap: Rs.65,83,565/-; and (ii) foreign exchange gain on raw/packing material: Rs.1,55,34,162/-. Being of the view that the aforesaid sales/foreign exchange gain did not have first degree nexus to the industrial activity of the assessee, the A.O was of the view that the same was wrongly included by the assessee while computing its eligible profits within the meaning of Sec. 80IC of the Act. Accordingly, the A.O after inter alia excluding the aforesaid amounts, viz. (i).scrap sales: Rs.65,83,565/-; and (ii). foreign exchange gain: Rs.1,55,34,162/-, therein reworked the assessee's claim for deduction under Sec. 80IC at Rs.321,50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to the sale transaction involving the export of goods of the industrial undertaking. The exchange rate fluctuation between the rupee equivalent of the value of the goods exported and the actual receipts which are realized arises on account of the sale transaction. The difference arises purely as a result of a fluctuation in the rate of exchange between the date of export and the date of receipt of proceeds, since there is no variation in the sale price under the contract. The view which we have taken is also consistent with the view taken by and Division Bench of this Court on 15th Dec. 2009 in the case of Syntel Ltd. (IT Appeal Nos.1974, 1976 and 1978 of 2009). In the circumstances, w would affirm the judgment of the Tribunal insofar as the question of exchange rate fluctuation is concerned" We find, that as per Sec.80IB of the Act, the assessee alike the deduction contemplated under Sec.80IC is eligible for deduction of any profits and gains derived from any eligible business therein referred to in the said section. In its aforesaid order, it was observed by the Hon'ble High Court that as the exchange rate fluctuation arises out of and is directly related to the sale tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that the A.O had erred in making an adjustment of Rs. 69,81,039/- to the income of the assessee w.r.t the provision of the research and development/testing services. Elaborating on its aforesaid contention, it is the claim of the assessee that the TPO had arbitrarily selected two additional companies as comparables, despite the fact that the same were functionally different from the assessee. It was submitted by the ld. A.R that the 'Profit Level Indicator' (for short 'PLI') of the assessee company as per the TP study report was arrived at 10% on cost as against the average PLI of the comparables which worked out at 12.58% on single year update basis. It was submitted by the ld. A.R that as the arithmetical mean price was within the range of +/- 5% of the price charged in its international transactions, the same, thus, was treated as being at arm's length. It was submitted by the ld. A.R that the assessee had selected 12 companies as comparable out of which only 4 comparables were accepted by the TPO, who further selected two new comparables and arrived at an average PLI (OP/TC) of 22.80%, as under: Sr. No. Name of the company OP/TC (%) 1. Aurigine Dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comprises : Seismic data acquisition * Designing and preplanning of 2D and 3D surveys * Seismic data acquisition in 2D and 3D Seismic data processing * Seismic data processing of 2D and 3D data * Reprocessing * Special processing including pre-stack imaging * AVO inversion and other services Seismic data interpretation * Structural and Stratigraphic interpretation * Generation, evaluation and ranking of prospects * Reservoir data acquisition * Reservoir analysis Also we observe that the profit and loss account of the company reflects that the whole operating income is from seismic survey and related service. The Company's business consists of one reportable and geographical segment of seismic data acquisition and its related service within India. In the case of the appellant before us, they provide testing related services to Colgate Palmolive USA. Therefore, we have no hesitation in excluding Alphageo (India) Ltd. from the set of comparables arrived at by the TPO/AO. Accordingly, we direct the AO to exclude Alphageo (India) Ltd. from the final set of comparables." 50. Per contra, the ld. D.R could not controvert th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contra, the ld. D.R could not controvert the aforesaid claim of the assessee. 54. We have heard the authorized representatives for both the parties in context of the aforesaid issue, and also perused the orders of the lower authorities. On a perusal of the order of the TPO and that of the DRP, we find, that neither of the said authorities had given any cogent reason for including/upholding the inclusion of the aforementioned company as a comparable in the final list of the comparables for benchmarking the international transactions of the assessee before us. Admittedly, as is discernible from the financial statements of the aforementioned company, we find that it is inter alia engaged in the business of selling chemical compounds, which as observed by us hereinabove constitutes 1/3rd of its total turnover. We find substantial force in the contention of the ld. A.R that as no segmental information w.r.t the aforementioned company was available, the same, thus, could not have been adopted as a comparable for benchmarking the international transactions of the assessee for the year under consideration. Apart from that, we find that the coordinate bench of the Tribunal i.e ITAT, Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. A.R in order to buttress his claim that the aforesaid companies were functionally comparable and had rightly been selected by the assessee in the final list of comparables therein took us through the relevant pages of the APB which are being dealt with by us as herein below: 56. Clinsys Clinical Ltd: The ld. A.R took us through the financial statements of the aforementioned company. Taking us through the functional profile of the aforementioned company, it was submitted by the ld. A.R that its services included project management, regulatory consultancy data management and bio-statistical support. It was, thus, submitted by the ld. A.R that there was no justification on the part of the TPO/DRP to have rejected the aforementioned company from the final list of comparables. In order to buttress its claim for inclusion of the aforesaid company in the final list of comparables, the ld. A.R took us through its profit and loss account, which revealed that the same was mainly comprised of the contract clinical research and service fees. 57. Per contra, the ld. D.R. could not controvert the aforesaid claim of the counsel for the assessee that the lower authorities had whimsically e ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
