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2015 (7) TMI 871
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.... 32,03,384/- on the study in foreign of Shri Hammad Rahman and Shri Ebbad Rahman and also remuneration of Rs. 1,20,000/- paid to Shri Hammad Rahman clearly covered u/s 40A(2)(b) of the I.T. Act, 1961. 3. The Ld. CIT(A) has erred in law and on facts in allowing relief of Rs. 6,00,000/- on Directors remuneration without appreciating the fact that remuneration was enhanced drastically even when there was almost no growth in business. 4. That the order of the Ld. CIT(A) being erroneous unjust and bad in law be vacated and the order of the Assessing Officer restored." 3. The grounds raised by the Revenue in I.T.A. No. 316/Lkw/2013 are also extracted hereunder for the sake of reference: "1. The Ld. CIT(A) has erred in law and on facts in allowing the relief of Rs. 8,20,572/- on expenditure incurred on study abroad of Shri Hammad Rahaman, the son of a Director and also remuneration of Rs. 1,20,000/- paid to Shri Hammad Rahaman even when he is clearly covered u/s 40A(2)(b) of the I.T. Act, 1961. 2. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,23,73,153/- made by the AO by way of adjustment of transfer pricing un....
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.... resale method to determine the Arm's Length Price whereas in succeeding assessment year i.e. 2008-09, TPO himself has adopted the TNMM method to determine the Arm's Length Price. The CIT(A) was also of the view that the resale method cannot be applied to determine the Arm's Length Price in case of an exporter. The CIT(A) however also rejected the CUP method adopted by the assessee for determining the Arm's Length Price considering the TNMM method as most appropriate method to compute the Arm's Length Price. The assessee has furnished the calculations as per TNMM method also, which was verified by CIT(A) and on verification, the CIT(A) was of the view that the difference between the two PLIs is within range of +5% therefore, no adjustment was required to be made. He accordingly deleted the adjustment of Rs. 57,07,130/- made by the Assessing Officer. He however asked the Assessing Officer/TPO to verify the calculation. 5. Aggrieved, the Revenue has preferred an appeal before the Tribunal and learned D.R. has placed reliance upon the order of the Assessing Officer and the TPO whereas learned counsel for the assessee, besides placing reliance upon the orde....
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....ugh the impugned order of the Ld. TPO and also the submissions made by the appellant in this regard. Some of the salient features of this order of the TPO are: i. That the TPO has rejected the CUP method as adopted by the assessee by observing: 4. Transfer Pricing approach of the Assesses and TP analysis The assesses has benchmarked its international transactions by using CUP method by comparing average price of various categories of products (based on price range) with average price for similar category of products sold to third parties. 5. Defects in method adopted by assessee The categorization of products based on price range is flawed on account of the following reasons: * Prices of identical products needs to be compared rather than price of a category of products. * Categorization, if at all, may be made, of identical products. Categorization based on price range has an inherent flaw, since, the price of the product is what is being compared. A product worth Rs. 500 if sold to the AE at Rs. 400, would be compared with products that have a price of Rs. 400. Such a comparison is bound to show that the transaction p....
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....or by adopting RSM Method as the same was applicable only for importers and not for an exporter. 4.4 Discussion & Decision: 4.4.1 I have perused the order of the TPO and also the submission made by the Ld. A.R. At the outset, it may be observed that the RSM Method as adopted by the TPO was not legally correct as the same is applicable only for importers, whereas the present assessee is in the business of exports only. The CUP method has already been rejected by the TPO and the assessee has not disputed such rejection. I also find that in the subsequent year i.e. 2008-09, the TPO has adopted TNMM as the most appropriate method to compute the ALP. Accordingly, I am of the considered view that TNMM should be adopted as the most appropriate method for computing ALP even for this year i.e. A.Y.2007-08. In this regard, the Ld. A.R. of the appellant/vide my letter dated 04.01.2013 was requested to give financial details of comparable companies (as adopted by the TPO in A.Y. 2008-09). The letter reads as under: "F.No.CIT(A)-I/310/DCIT-VI/KNP/2012-13 Dated:04/01/2013 To, The Principal Officer M/s Rahman Industries Ltd. Kanpur ....
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....of the CIT(A) in its order has been pointed out by learned D.R. He simply placed reliance upon the order of the TPO and the Assessing Officer. Nothing has been placed to justify that the TPO has rightly adopted the resale method to determine the Arm's Length Price whereas the assessee is 100% exporter. Since the CIT(A) has adopted the TNMM method following the method adopted by TPO in succeeding year to determine the Arm's Length Price, we find no infirmity in his order. Moreover, having noticed the difference between two PLIs in the range of +5%, the CIT(A) has rightly deleted the additions as no adjustment was required for such difference. Since we find ourselves in agreement with CIT(A), we confirm the same. 8. In the assessment year 2008-09, the TPO has followed the TNMM method after rejecting the CUP method for determining the Arm's Length Price but while determining the Arm's Length Price, the TPO has made certain adjustments resulting into addition of Rs. 2,23,73,153/-. When the appeal was preferred before the CIT(A), the assessee has pointed out certain mistakes apparent in the calculation of the TPO. It was contended by the assessee that following ....
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....100 27,82,32,249 40,36,372x100 32,56,41,490 = 9.656% 1.23% (*) appears to be a typographical error, it should have been Rs. 3,48,35,492/- as per ** (***) arithmetical mistake. Accordingly, it is prayed that the adjustment ordered to be made by the TPO to the extent of Rs. 2,23,73,153/- being ALP adjustment be deleted." 8.1 These calculations were examined by CIT(A) and being convinced with it, the CIT(A) was of the view that the calculation made by TPO of the PLIs (OP/TC) in the case of the assessee is erroneous as the TPO has made factual and conceptual error by not considering the variation in closing stock, which is essential in determining the correct total cost and operating profits. The CIT(A) accordingly deleted the additions made on this count. The relevant observations of CIT(A) are also extracted hereunder for the sake of reference: "4.3.1 The appellant company had certain international transactions with its AEs to which Indian Transfer Pricing Regulation (contained in Sec. 92 to Sec. 92 F of the I.T. Act) apply. In order to establish whether such transactions (between the appellant company and its A.Es adher....
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....rt sale (84%) 1,19,30,30,814 Export to AE (25.25%) 30,48,35,492 Total expenses 1,32,49,15,473 (before finance charges) (This is after adjustment on account of variation of closing stock of Rs.22,57,58,291/-) Expenses for export (84%) 1,11,29,28,997 Expenses for export to AE (25%) 27,82,32,249 Total sales to AE 30,48,35,492 Operating profits = 2,66,03,243 PLI = OP (on export to AE) TC 2,66,03,243 x 100 27,82,32,249 = 9.56% 4.3.5 The average PLI of other comparables (as computed by the TPO himself) comes to 8.11%. The PLI of the appellant company is 9.56%, which is more than the average PLI of the comparable companies, thus, there was no occasion for the TPO to order for adjustments. In view of the matter, the Assessing Officer is directed to delete the addition made on this account." 9. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed reliance upon the order of the TPO and Assessing Officer whereas the learned counsel for the assessee besides placing reliance upon the order of CIT(A) has contended that ....
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....y is placed on record with the submission that the issue was squarely covered by the order of the Tribunal in favour of the assessee. In that assessment year, the Tribunal has confirmed the order of the CIT(A) who has deleted the addition made on account of disallowance of expenses incurred on study of the aforesaid persons. For the sake of reference, we extract the relevant portion of the order of the Tribunal as under: "15. We have considered the rival submissions. This issue was decided by the CIT(A) as per Para 8 & 9 of his order and for the sake of ready reference, the same are reproduced below: "8. I have considered the facts and circumstances of the case and submissions of the appellant. Admittedly, the amount of Rs. 25,49,622/- has been incurred on the technical education of Mr. H. Rahman. The AO has not questioned the genuineness of the expenditure. Same has been disallowed u/s 40A(2)(b) of the I.T. Act. However, as far as the amount of expenditure on the technical education of Mr. H. Rahman is concerned, it is not recorded by AO that amount of Rs. 25,49,622/- was "excessive" in relation to any other such case of the expenditure on the professional course....
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....the appellant company to remain updated in terms of technology and superior man power equipped and skilled to ensure future growth and development of business is a valid business consideration and very much a part of the business expediency. The decision in the case of DCM v. CIT 158 ITR, CIT v. Telco 123 ITR and Hindustan Aluminum v. CIT 159 ITR have laid down that "the expenditure/payment on 'sending employees abroad for training', or 'to study the advances made in foreign countries' is allowable as revenue business expenditure". It was held in J.B. Advani & Co. Ltd. v. CIT [2005] 1 SOT 830 (Mum.) - "Foreign study expenses incurred by a company in respect of an employee cannot be disallowed simply because employee happens to be relative of a director. In the instant case, X was not only the daughter of one of directors of the assessee company but also an employee of the assessee company. The assessee company is on a better footing in the instant case. Not only that, S, on returning to India, continued to work for the assessee in compliance of the agreement she had entered into with it before leaving India. She has been further made as a director of the assessee co....
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.... order of CIT(A). This ground of the Revenue is dismissed.' 12. Since the impugned issues are squarely covered by the order of the Tribunal, we confirm the order of CIT(A) following the same. 13. The other issue in these grounds relates to the remuneration of Rs. 1,20,000/- paid to Shri Hammad Rahaham. The assessee has claimed the payment of Rs. 3,00,000/- as remuneration to Shri Hammad Rahaham, which was disallowed by Assessing Officer on the ground that Shri Hammad Rahaham was studying in abroad and was doing whole time course of technical education then how he could spare time for business activities. The assessee preferred an appeal before CIT(A) with the submissions that there is no bar in payment of salary to an employee who was doing a particular technical course for the benefit of the assessee company. The CIT(A) has reexamined the entire issue and allowed the salary of Rs. 1,20,000/- per month. Against the allowance of Rs. 1,20,000/-, the Revenue is in appeal before us and placed reliance on the order of the Assessing Officer whereas learned counsel for the assessee has placed reliance on the order of CIT(A) that the payment of salary was made as per ....