TaxTMI 
TaxTMI 
2015 (3) TMI 318
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....l expenditure without appreciating that the same was revenue expenditure in nature. 3. The learned A.O. / DRP erred in holding the sale tax / purchase tax subsidy of Rs. 6,91,61,972/- received by the assessee from SICOM as a revenue receipt on the ground that the subsidy given was for increasing the profitability of the assessee. 4. The learned A.O. / DRP erred in recomputing the transfer price of the international transactions relating to exports of tractors despite the fact that none of the conditions as prescribed in Section 92C(3) of the Income Tax Act, 1961 ('the Act'), had been violated by the appellant. Thus, the A.O. / DRP erred in making an addition of Rs. 33,59,50,091/- u/s 92C on the basis of the order of the TPO u/s 92CA(3) dated 21.10.2009 in the case of the appellant company. 3. The ground Nos. 1 is in respect of payments made to John Deere India Pvt. Ltd. (in short "JDIPL"). The facts which revealed from the record are as under. The assessee company is engaged in the business of manufacturing and selling agricultural farm equipments like tractors, aggregates, part and components. The assessee was a joint venture company between Larsen & Turbo Limited....
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....ce of reimbursement of expenses. It has also been produced on record that the company had entered into an agreement dated 10-02-1998 with its joint venture company i.e. John Deere India Pvt. Ltd. and that agreement was for rendering know how and other activities related to manufacturing of tractors. There was a clause as per the said agreement that in consideration of technical consultancy services rendered or to be rendered by the consultant a lumpsum payment of Rs. 4 lakhs to be made by the assessee company for the period from the date of incorporation up to 31-03- 1998. Therefore it was argued that after the said period i.e. 31-03- 1998 the payment was nothing but reimbursement of salary to expatriate. Considering all these evidences such as the terms of the agreement, bills raised etc. it clearly indicates that the expenditure was towards reimbursement of salary hence the view taken by Ld CIT(A) that it was revenue in nature deserves to be affirmed. We uphold the said view and dismiss this part of ground of the Revenue." 4.1 We, therefore, following the decision of the Tribunal in the asseessee's own case in the A.Y. 2001-02, we reverse the order of the Ld. CIT(A) on this is....
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.... & development at Rs. 36,00,000/- and SAP Licence fees at Rs. 2,82,000/-. The Ld. CIT(A) has allowed the claim of the assessee by following his order for the A.Y. 2001-02. The A.O in compliance of the direction of the Tribunal for A.Y. 2001-02, in his order passed u/s. 143(3) r.w.s. 254 of the Act after verifying the claim has also held that the said expenditure is revenue in nature. The Tribunal had set aside the matter to the file of the A.O. to decide the matter afresh in view of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises (Supra). We thus do not find infirmity in the first appellate order in this regard. The same is upheld. Ground No. 1 is accordingly rejected. 5.1 We, therefore, following the order in the asseessee's own case in A.Y. 2002-03 allow the Ground No. 2 and delete the addition. It is pertinent to note here that in the A.Y. 2002-03 the Tribunal has considered the order passed by the Assessing Officer in the A.Y. 2001-02 u/s. 143(3) r.w.s. 254 of the Act. As the facts are identical in this year, there is no reason to take different view. Accordingly, Ground No. 2 is allowed. 6. The next issue which arises from Ground ....
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....idy as a revenue receipt and for the first time in this year the assessee has claimed it a capital receipt. Now, the assessee is in appeal before us. 8. We have heard the rival submissions of the parties and perused the record. The main plank of the argument of the Ld. AR is that the assessee become eligible for the sales tax subsidy as it complied with the terms and conditions of "1993 Package Scheme of Incentives" introduce by the Govt. of Maharashtra for encouraging the industrialization of the backward area and dispersal of industries from the developed area. He referred to the "1993 Package Scheme of Incentives" and submits that the Package Scheme of Incentive introduced by the Govt. of Maharashtra has been examined by the Hon'ble ITAT, Special Bench, Mumbai in the case of Reliance Industries Ltd. (supra). He submits that the matter was carried before the Hon'ble High Court of Bombay in the case of CIT Vs. Reliance Industries Ltd. 339 ITR 632 and the decision of the Hon'ble ITAT, Special Bench, Mumbai has affirmed by holding that the sales tax subsidy received by the assessee in the said case partakes character of the capital receipt. He submits that in the case....
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....notified in the GR dated 05-01-1980. It was a contention of the said assessee that the earlier incentive schemes were fine-tuned to make 1979 Package Scheme so as to make them more effective, employment oriented and to encourage economic growth of backward areas. It appears that there was a conflicting decision on this issue decision in the case of M/s. Bajaj Auto Ltd. (ITA No. 49/Bom/91 and 1101/Bom/91) dated 31.12.2002 and matter was referred to the Special Bench. The operative part of the discussion and finding of the Hon'ble ITAT, Special Bench in Reliance Industries Ltd. (supra) is as under: "35. Coming to the facts of the case, they have all been adverted to in the Tribunal's orders, both for the asst. yrs. 1984-85 and 1985- 86. When the assessee applied for the subsidy on 16th Dec., 1980, it did not have any industrial unit in the State of Maharashtra, but was running a synthetic textile mill at Naroda, Ahmedabad. It has been observed by the Tribunal that the assessee had taken possession of the land in June, 1980 in Patalganga Industrial area and spent Rs. 1.40 crores for that purpose. It had also obtained registration from the Ministry of Industry, Government of....
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....rders of the Departmental authorities. The position before us, with respect, is the same. Even with regard to the other question as to whether the Tribunal erroneously interpreted the judgment of the Supreme Court in Sahney Steel (supra), the arguments of the Department were the same in the sense that even in the appeal before the Tribunal for the asst. yr. 1985-86, as we find from the order of the Tribunal, the arguments were focused upon the pivotal point that the ratio laid down by the Supreme Court in Sahney Steel (supra) was that if the subsidy is received after and conditional upon the commencement of production, irrespective of the object for which the subsidy is given, it constitutes a revenue receipt in the assessee's hands. This argument has been rejected by the Tribunal in its order for the asst. yr. 1985-86 for reasons which we have already discussed in some detail and the same arguments have been pressed into service before us also. Additionally, the order of the Tribunal in Bajaj Auto Ltd. (supra) was also heavily relied upon. We have already expressed our inability to share the view expressed in Bajaj Auto Ltd. that the Tribunal in the case of RIL for the asst. y....
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....turing Co. (2003) 183 CTR (MP) 590, the subsidy was expressly given to meet expenditure on power. The Madhya Pradesh High Court held, following the judgment of the Supreme Court in Sahney Steel (supra) and in CIT vs. Rajaram Maize Products (supra) that since the subsidy is given for the purpose of meeting a part of the expenditure on power, it was revenue receipt in the assessee's hands. In both the cases, the object of the subsidy was not to encourage the setting up of factories or for industrialization of any particular area of the State. The object was to assist or lend a helping hand to the concerned assessees after they commenced production so that they tide over the initial difficulties in running the factories. The subsidy in both the cases was an operational subsidy. The facts in these two cases being different from the facts of the present case, they are not applicable. 37. In the paper book filed by the Department containing the above judgments, we noticed a judgment of the Madras High Court in CIT vs. Ponni Sugars & Chemicals Ltd. (2003) 179 CTR (Mad) 477 : (2003) 260 ITR 605 (Mad). In this case, the assessee received two types of subsidies. One was under a Scheme....
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....the name given by the assessee or even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling with the capital field or out of it. If the true character of the incentive here is to enable the assessee to meet the capital cost, then that true character must be given full recognition and the fact that the receipt was subsequent to the commencement of production (can) not be allowed to stand in the way of its proper treatment as a receipt in the capital field meant to meet a capital cost. The line separating "capital" from "revenue" is a line which is not fixed and unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital or in the revenue field..................... The purpose and object of the Scheme, therefore, is of vital significance and decided cases which turn upon the special facts cannot pre-determine the outcome of another case merel....
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....ce there are other grounds in the appeal of the assessee and since there is also an appeal by the Department, they will go back to the Division Bench for being disposed of in accordance with law." 11. It is pertinent to note here that the Hon'ble Special Bench, ITAT has considered the decision of the Hon'ble Supreme Court relied on by the Assessing Officer in the case of Sahaney Steels and Press Work Ltd. (supra). It is also pertinent to note here that the said issue was further carried by way of appeal by the revenue before the jurisdictional High Court and the Hon'ble High Court has affirmed the order of the ITAT, Special Bench, Mumbai in case of Reliance Industries Ltd. (supra) by holding that the subsidy is clearly on the capital account. We have also considered the "1979 Package Scheme of Incentives" and as well as Package Scheme of 1993 introduced by the Govt. of Maharashtra. As rightly argued by the Ld. AR the object and purpose for which the incentive by way of sales tax subsidy is given are the identical in both the Incentive Schemes. It is true that in the preceding years the Tribunal has set aside the issue to the file of the Assessing Officer for the fres....
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....for the export of tractors by the assessee company to its AEs of Rs. 431.87 Crs. The TPO held that the transactions of export of tractors by the assessee company to its AEs were not at ALP and therefore, the addition was required to be made. 13.2 According to the TPO, the assessee company had adopted transactional net margin method (TNMM) for determining the international transaction of exports of tractors. The assessee company had selected 8 companies as comparable and contended that the net operating margin earned by it in export segment was much higher than the average operating margin of 8 comparable companies. Accordingly, the assessee claimed that it's transactions of export of tractors to its AEs were at ALP. The assessee also filed the chart of the operating margins of the comparable entities and since the operating margin of the assessee company was much higher, it was claimed that the transactions are at Arm's Length Price (ALP). 13.3 The TPO has held that the TNMM is not the most appropriate method for determining the ALP and in his opinion that the Cost Plus Method (CPM) is the most appropriate method for determining the ALP. The TPO has observed that the assessee....
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....ages 31-33 of the TP order]. The TPO has further held that the total turnover of the assessee company is Rs. 808 Crs. and hence, the companies with turnover ranging between Rs. 500 Crs. to Rs. 1,000 Crs. only should be considered as comparable with the assessee. In short, the TPO applied turnover filter. Accordingly, he has held that after applying the above filters, the only two companies left would be Punjab Tractors Ltd. (OPM - 11.5%) and International Tractors Ltd. (OPM - 15.41%). 13.6 Finally, after rejection of some of the comparables and holding that CPM is the most appropriate method, the TPO worked out the G.P. over cost in the export segment at 18.52% and in the domestic segment at 27.65% (Page No. 21 of TPO order). He computed the difference between the two at 9.13% and accordingly, he has made an adjustment of Rs. 33.59 Crs. which is being challenged by the assessee company in this appeal. 14. The assessee company strongly objected to the addition made by the TPO. Ld. A.R. submitted that the assessee company had adopted transactional net margin method (TNMM) for determining the ALP in respect of export of tractors to its AEs. It is submitted that the net operating....
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....te method for determining the ALP for all the earlier years and also accepted for the subsequent year i.e. A.Y. 2008-09 and hence, the TPO has conveniently ignored this aspect. It is argued that the TPO has not stated as to how the facts of the current year are different than those in the earlier years. Ld. AR submitted that since the TPO has not been able to demonstrate as to how the factors which were relevant for the earlier years have changed in this year, the TPO has not been able to discharge the burden placed on him by Sec. 92C(3) and hence, the adoption the CPM method is without any basis and not justified at all. In this context, Ld. AR relied upon the following decisions to support his argument that if the TPO wants to determine the price under a different method, he has to demonstrate that the price determined by him reliable and reasonable by adopting the different method - a. Aztec Software Technology Services Ltd. v. ACIT [107 ITD 141 (Bang) (SB)] b. MSS India Pvt. Ltd. [123 TTJ 657 (Pune)] Ld. AR vehemently submitted that as the facts for this year are similar to the facts involved in the earlier years, the TPO is not justified in rejecting TNMM as the most ....
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....Machinery Corp. Ltd., all the other 7 companies were selected by it as comparable entities in A.Y. 2005-06 and the same were accepted by the TPO. It is was pointed out that in A.Y. 2005-06, the turnover of the assessee company was Rs. 633 Crs. whereas the turnover of the comparable entities was ranging from Rs. 285.7 Crs. to Rs. 2543.03 Crs. Ld. AR submitted that company wise turnover for A.Y. 2005-06 is given on page 27 of DRP Application filed in Form No. 35A for this year. It was clarified that the TPO has accepted almost similar turnover range in A.Y. 2005-06, there is no reason as to why he should object to the set of comparables adopted by the assessee in the current year. The assessee stated that there is no reason to disturb the set of comparables on the reason of turnover filter, particularly because of the fact that similar turnover filter was adopted in A.Y. 2005-06 and was accepted by the same TPO while determining the ALP. 14.6 The assessee further submitted that the TPO had adopted a very narrow turnover filter of companies having turnover of Rs. 500 Crs. to Rs. 1000 Crs. It is stated that the turnover of the assessee was Rs. 808 Crs. and hence, the companies selec....
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....selling tractors and therefore, the assessee has considered it as a comparable entity and this point was clarified to the TPO. The assessee would clarified that in respect of HMT, more than 90% of the total turnover was on account of sale of tractors and hence, even in the absence of the segmental results, HMT should be considered as a comparable entity. Without prejudice, the assessee contended that assuming without admitting that the contention of the TPO is correct with regard to the 4 companies, still the balance 4 companies are comparable to the assessee company and in the absence of any objection raised by the TPO, the same should be considered as comparables. Ld. AR stated that the net operating margins of the balance 4 companies is within plus or minus 5% of the net operating margin of the export segment and hence, the transactions are at ALP and the relevant working is as under - Sr.No Name of the company Net operating margin 1 Tractors & Farm Tractor Ltd. 11.90% 2 Mahindra & Mahindra Ltd. 8.65% 3 Punjab Tractors Ltd. 11.50% 4 International Tractors Ltd. 15.41% Average net operating margin 11.87% Net....
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....ent of expenses, and therefore, comparison of export and domestic profitability would be comparison of one controlled transaction with another controlled transaction, which is not envisaged in CPM. It is contended that internal CPM also is required to be rejected. It is thus submitted that for the purposes of application of any method, whether it be CPM or TNMM, the transaction being considered as benchmark should be both uncontrolled and comparable. 14.12 Ld. AR also contended that the TPO was not justified in adopting the CPM on the ground that the assessee had a joint manufacturing facility and the AEs had agreed for long term buy and supply arrangement. It is submitted that a joint facility arrangement is where a company purchases semi-finished goods from the principal, carries out operations and sells the finished goods back to the principal, involving in some cases the transfer or licensing of intangible property from the principal to the manufacturer. It is submitted before us that a Joint facility arrangements/long term buy and supply arrangements are the ones where the associated enterprise is a contract manufacturer carrying low risks and carrying out low - level funct....
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....further submitted that considering the various differences in the two segments, the CPM adopted by the TPO is not correct. In this context, Ld. AR placed reliance on the decision of ITAT, Pune in the case of Drilbits International Pvt. Ltd. In that case, the TPO had rejected TNMM method and had computed the ALP by adopting the CPM. The assessee explained that there are various differences in the two segments in the form of marketing functions, credit risk, types of customers, etc. etc. and hence, the CPM could not be applied. ITAT in para 50 of the order has held that considering the differences in the functions performed and the assets utilized, suitable adjustments are not possible to be made and hence, the CPM was not the most appropriate method for determining the ALP. Accordingly, considering the principle laid down by Hon'ble ITAT, the assessee submits that CPM is not the most appropriate method for determining the ALP. 14.16 Ld. AR also relied upon ITAT, Pune decision in the case of Alfa Laval India Ltd. (149 ITD 285) wherein similar issue was involved. In that case, the assessee had adopted TNMM as appropriate method for determining the ALP. However, the TPO rejected....
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....o not affect the gross margins and therefore, the TPO was justified in disallowing the adjustments on account of differences pointed out by the assessee. The Ld. CIT (DR) also argued that CPM is the direct method and hence, preference to the same should be given as against TNMM which is an indirect method for determining the ALP. Accordingly, it is submitted by Ld. CIT (DR) that TNMM is rightly rejected by the TPO and the addition made is justified on the facts of the case. 16. We have heard the rival submissions of the parties and perused the record. We have also considered all the decisions and precedents relied on by both the parties. On this ground there are two sub issues - first is rejection of the TNMM method adopted by the assessee and substituting the said method with CUP by the TPO/DRP and second issue is in respect of the ALP adjustment made by the Assessing Officer. In this case, the ALP adjustment is made only to the export of tractors and in respect of other reported transactions the Assessing Officer has accepted the method adopted by the assessee as well as determination of the ALP as per the T.P. study filed by the assessee. The contention of the assessee is tha....
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....than the preceding years: i. Alfa Laval (I) Ltd. 149 ITD 285 (Pune). ii. H.A. Shah & Co. Vs. CIT 30 ITR 618 (Bom). iii. Brintons Carpets Asia (P) Ltd. 139 TTJ 177 (Pune) iv. Drilbits International Pvt. Ltd. 62 DTR 171 (Pune). v. Agility Logistics (P) Ltd. 145 ITD 566 (Mum). vi. Skol Breweries Ltd. 153 TTJ 257 (Mum). 18. Now, let us look into the T.P. study report filed by the assessee before the TPO. The TPO has rejected the comparable entities selected by the assessee company. It is seen that in the A.Y. 2005-06 out of the 8 comparable selected by the assessee, 7 comparable were common and the TPO has not disputed those in that year. In this year, the TPO expressed the reservation on the comparable selected by the assessee to support his working of the ALP. There cannot be two standards for the Assessing Officer one standard in one assessment year and different standard in the subsequent year without explaining how facts differ. It is seen that the TPO has gone on the turnover for rejecting the comparable of the assessee but in the preceding year A.Y. 2005-06 the TPO had accepted the very same companies as comparable. If TPO desires to reject the comparable as....
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.... that in the preceding year the TPO accept those companies as a comparable have determining the ALP when in that year also all the facts and figures were before him in the A.Y. 2006-07 the TPO adopt the different approach. In respect of the reservation of the TPO to accept the Escorts as a comparable, the assessee's contention is that the main business is of selling tractors and hence, the assessee has considered said company as a comparable entity and this was demonstrated before the TPO also. In respect of the HMT also the turnover of the tractors accounts for 90% of the total turnover hence, even in the business of the segmental results HMT should be considered as a comparable entity. The alternate contention of the assessee is that even if the TPO is correct with regard to the four companies cited (supra) but still balance four companies are comparable to the assessee company and in the same business as no specific objection is noted by the TPO, those companies should be considered as comparable. The assessee states that net operating margins (NOM) of the balance four companies is within plus or minus 5% of the net operating margin of the export segment and hence, the transacti....
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....two segments in the form of marketing functions, credit risk, types of customers, etc. etc. and hence, the CPM could not applied. The Tribunal held that considering the differences in the functions performed and the assets utilized, suitable adjustments are not possible to be made and hence, the said case CPM was not the most appropriate method for determining the ALP. The operating part of the discussion in the said decision is as under: "50. Considering the above submissions, vis-à-vis the method i.e. CPM (cost plus method) adopted by the learned TPO to determine the ALP, which has been relied upon by the learned Departmental Representative, we find that the learned TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment vis-a-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, no risk of bad debts, no pr....
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.... ignored as ultimately the income-tax is levied on net profit and therefore, comparison of the net profit of the domestic export segment is more proper. The assessee at page No. 141 of the paper book has given working of the net profit of the two divisions as per which, the net profit of the domestic segment is 13.04 per cent and that of the export segment is 12.55 per cent. We find that there is hardly any difference between two segments. We also find substance in the submission of the learned Authorised Representative that in respect of transaction with AE, the assessee also does not have to bear bad debt risks, product/warranty risks etc., hence some percentage of reduction should he given in the margin computed for the domestic segment for the above risk. 52. Considering the above material facts in totality, we are of the view that the learned TPO was not justified in adopting the CPM as the most appropriate method. On the basis that the assessee had a joint facility arrangement or a long-term buy and supply arrangement with its AE, as we have discussed hereinabove, we find that there was no sufficient reasons with the learned TPO to reject CUP method or TNMM adopted by the ....
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....ropriate method for determining the ALP in respect of export of the tractors to the AEs and we approve TNMM as a most appropriate method adopted by the assessee for determining the ALP. We also hold that even after excluding KAMCL the average operating profit margin of the 7 companies are at 5.71% as against the 11.70% of the export segment of the assessee company. The ALP declared by the assessee is well within the limit. We, accordingly, hold so. In the result, the Ground No. 4 is allowed. 24. Now, we take up the assessee's appeal for the A.Y. 2007-08 being ITA No. 1686/PN/2011. The assessee has filed the concise grounds. Ground No. 1 reads as under: 1. The learned A.O. / DRP erred in holding the sale tax / purchase tax subsidy of Rs. 9,51,40,606/- received by the assessee from SICOM as a revenue receipt on the ground that the subsidy given was for increasing the profitability of the assessee. 25. The facts which revealed from the record as under. The assessee had established an unit at Sanaswadi near Pune in 1998. The Government of Maharashtra had introduced a Maharashtra's "1993 Package Scheme of Incentives". This scheme was introduced for giving incentive to the u....
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....ies as comparable entities: S. No. Name of the Company 1 Escorts Ltd. 2 Tractors & Far Equipment Ltd. 3 Mahindra & Mahindra Ltd. 4 VST Tillers Tractors Ltd. 5 Punjab Tractors 29. The PLI taken for the purpose by the assessee was net operating profit margin (0PM) to total sales. It was contended by the assessee company that its PLI was much more than the average 0PM of the comparable entities. Based on the above calculations, the assessee had submitted that the international transactions relating to export of tractors to its AEs were at ALP. It was also submitted by the assessee that TNMM was the most appropriate method for determining the ALP in respect of the international transactions relating to export of tractors in the earlier years also by the assessee. But the AO/TPO adopted Cost Plus Method (CPM) and made an upward adjustment of Rs. 49,18,60,160/- to the value of the international transactions relating to export of tractors. The reason for adoption of CPM as opposed to TNMM, according to the assessee, was that (a) there were functional and corresponding differences in assets and risk between the assessee company and the compa....
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....s. But there was no such arrangement between the assessee and the AEs. The sale to the AEs was purely governed by the demand and supply mechanism and there was no contract of whatsoever nature wherein the AEs had agreed to purchase a fixed quantity of tractors produced by the assessee company. The assessee sought to demonstrate that through on the fact that its domestic sales were increasing year-toyear and also there was considerable increase in the assessee's share in the domestic market, the assessee company had also purchased its raw material from local vendors and it was not a case of job work being carried out by the assessee for its AEs. The assessee also stated that just because 48% of the total revenue of the assessee was from exports, it did not mean that the assessee was a contract manufacturer. 30. The assessee submitted that it had requested for adjustment on account of following differences - Adjustment on account of difference in the level of value chain. Adjustment on account of sales and marketing functions and associated risks. Adjustment on account of warranty functions and associated risks. Adjustment on account of credit terms and associated risks. Adjus....