2023 (5) TMI 156 - AT - Income Tax

Partial Win in Tax Appeal: Deduction Approved for J&K Unit, UPS Depreciation Reassessed, Other Claims Dismissed.

The appeal was partly allowed, with the assessee succeeding on the claim of deduction under Section 80IB(4) for its Jammu & Kashmir Unit, and the issue of ... TP Adjustment on account of management service charges paid by the assessee to its AE - assessee benchmarked the transactions on aggregate basis by applying TNMM method - HELD THAT:- We concur with the observations of Ld. TPO that unless the transactions are closely linked to each other and the same belong to particular class of transactions, aggregation approach could be discarded and the transactions could be benchmarked separately. It could also be seen that the assessee has applied TNMM method for certain transactions, CUP method for another set of transactions and ‘other method’ for certain transactions. The same would show that all the transactions have not been benchmarked under one method by the assessee himself rather the assessee has applied more than one method to benchmark the various transactions in its TP study report. Therefore, Ld. TPO was quite justified in rejecting the aggregation approach and proceed to bench-mark the impugned transactions separately under CUP method. No fault could be found in the impugned order, to that extent. The corresponding grounds raised by the assessee stand rejected. Complete onus, in this regard, was on assessee to demonstrate that the actual services were rendered and received by it. The assessee, in our opinion, has failed to demonstrate the same. In such a scenario, the determination of ALP by Ld. TPO as ‘Nil’ could not be faulted with. On the given facts, Ld. TPO would be left with no option but to determine the ALP as ‘Nil’ since in the absence of receipt of services, there would be no necessity for the assessee to pay for such services and the question of application of any prescribed method to determine the ALP would not arise at all. Assessee has failed to establish the receipt of the services which would justify revenue’s stand that there was no need for the assessee to pay for such services. Case to be followed Akzo Noble India Ltd. [2022 (2) TMI 1301 - ITAT DELHI] - Decided against assessee. Deduction u/s 80IB(4) - manufacturing activity or not - profit earned out of Jammu & Kashmir Unit - claim denied as there was no transformation of the object. The raw material as well as finished product was flavors only. The assessee only adds certain chemicals to maintain longevity of the product and also to give some taste but there is no transformation of raw material into an entirely new and distinct product - HELD THAT:- As upon perusal of assessment order, we find that the whole case of revenue is that the activity carried out by the assessee would not amount to manufacture. We are of the considered opinion that the deduction could not be denied merely on the basis of suspicion without rendering any concrete finding in the assessment order. The plea that there was no research and development expenditure at Jammu Unit has no relevance in the context of present case since carrying out research activities is not essential ingredient of manufacturing. The finding of DRP that the essential elements giving rise to various flavours were produced outside Jammu units in places like Chennai and Chittoor and their ingredients are mixed or blended in Jammu unit based on the requirement of the customer and the same were not prepared directly but purchased by the assessee, would also not be of much relevance since nowhere it is a condition that the raw material should also be produced by the assessee before it could be said to be engaged in manufacturing. The assessee is mixing various raw materials to manufacture different commodity which fall under separate excise tariff heading. - Decided in favour of assessee. Depreciation on UPS - higher depreciation of 60% on uninterrupted power supply (UPS) equipment - HELD THAT:- We are of the opinion that UPS, if used along with computer system, would be integral part of computer system and would be eligible for same rate of depreciation as applicable to that block. If the UPS are used otherwise, the rate as applicable to electrical installations would apply. AO is directed to rework the same accordingly. The corresponding grounds stand allowed for statistical purposes. Depreciation on electrical installation - assessee claimed depreciation on electrical installations @15% - Treating the same as electrical fittings, Ld. AO allowed depreciation of 10% and added the differential depreciation of Rs.0.05 Lacs to the income of the assessee - HELD THAT:- We are of the view that electrical installations are part of electrical fittings and do not constitute Plant & Machinery. Therefore, the corresponding grounds raised by the assessee stand dismissed. Issues Involved:1. Transfer Pricing Adjustment on account of management service charges paid by the assessee to its AE.2. Assessee's Claim of Deduction u/s 80IB(4).3. Depreciation on UPS.4. Depreciation on electrical installation.Summary:1. Transfer Pricing Adjustment on account of management service charges paid by the assessee to its AE:The assessee carried out international transactions with its AE, including payment of management service charges. The Ld. TPO questioned the payment of these charges, noting that such payments were not made in earlier years and that the profit margins had decreased. The TPO rejected the assessee's aggregation approach and benchmarked the transactions separately under CUP method, determining the ALP of management service charges as 'Nil'. The Ld. DRP endorsed this view. The Tribunal concurred with the TPO's observations, stating that the assessee failed to demonstrate the receipt of services, the necessity for such services, and the benefit derived from them. Consequently, the determination of ALP as 'Nil' was upheld, and the corresponding grounds raised by the assessee were dismissed.2. Assessee's Claim of Deduction u/s 80IB(4):The assessee claimed deduction u/s 80IB(4) for profits earned from its Jammu & Kashmir Unit. The Ld. AO, relying on a report from the ACIT, Jammu, concluded that the assessee's activities did not amount to manufacturing but were merely blending and mixing of ingredients. The Ld. DRP concurred, citing various judicial precedents. However, the Tribunal noted that the Central Excise Department had accepted the assessee's activities as manufacturing, and the definition of 'manufacture' u/s 2(29BA) was broader. The Tribunal also referred to various judicial decisions supporting the assessee's claim. Consequently, the assessee's claim of deduction u/s 80IB(4) was allowed.3. Depreciation on UPS:The assessee claimed higher depreciation of 60% on UPS equipment. The Ld. AO treated the UPS as Plant & Machinery and allowed depreciation at 15%. The Tribunal opined that if UPS is used along with a computer system, it should be eligible for the same rate of depreciation as applicable to the computer system. The Ld. AO was directed to rework the depreciation accordingly, and the corresponding grounds were allowed for statistical purposes.4. Depreciation on electrical installation:The assessee claimed depreciation on electrical installations at 15%. The Ld. AO treated these as electrical fittings and allowed depreciation at 10%. The Ld. DRP confirmed this view. The Tribunal agreed, stating that electrical installations are part of electrical fittings and do not constitute Plant & Machinery. Consequently, the corresponding grounds raised by the assessee were dismissed.Conclusion:The appeal was partly allowed, with the assessee succeeding on the claim of deduction u/s 80IB(4) and the issue of depreciation on UPS being remanded for reworking. The grounds related to transfer pricing adjustment and depreciation on electrical installations were dismissed.