TaxTMI 
TaxTMI 
2016 (7) TMI 28
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..... The DRP issue directions to the AO wide its order dated 28/09/2010. In pursuance of the said directions, the AO completed the assessment, determining the income of the assessee had Rs. 59.89 crores. 2. First ground of appeal relates to Transfer Pricing (TP)adjustments of Rs. 2.80 crores. During the TP proceedings, the TPO found that the assessee had entered into the following IT.s with its AEs: Sr.No. Nature of Transaction Amount(Rs.) 1. Import of raw material 112, 95, 51, 398 2. Import of traded products 7, 75, 70, 764 3. Export of finished products 80, 60, 91, 048 4. Sale of Asset 26, 29, 000 5. Payment of indenting commission 38, 84, 001 6. Import of Software 55, 62, 236 7. Provision of SAP support services 2, 03, 49, 405 8. Recovery of expenses 48, 65, 599 9. Reimbursement of expenses 10, 38, 28, 884 He found that the assessee had used the Internal Transaction Net Margin Method(TNMM), that net profit margin(operating profits/sales)was the Profit Level Indicator(PLI)for computing ALP of the above transactions, that the assessee had selected comparables from Prowess Data Base. While ....
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....n identified by the company based on products sold as captured in the audited sales register, that it employed standard cost system for capturing the cost of manufactured goods sold, that in determining the standard cost the company would take into account all the budgeted material cost and manufactur -ing overheads to arrive at a standard cost per product, that the assessee's system would capture various expenses for determining the standard cost of products sold, that use of such costing data gave a more reliable picture of the business segment, that it had scientifically determined the costing data, that the balance operating expenses which did not form part of the costs of goods sold and which could not be directly identified and allocated to various business segments had been apportioned to the MS and TS on prudent and relational basis using logical allocation keys. Manufacturing Trading SAP- Support Service Segment (Rs. in'000) Transactions with third parties Transactions with Associated enterprise (AE) Total Transactions with third parties Transactions with associated enterprise (AE) Total Grand Total Income ....
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.... in absence of the same allocations on the basis of turnover had to be rejected, that the variation on account of contract manufacturing , rendering manufacturing services, sourcing services the internal TNMM could not ensure the working of exact operating margin for an internal comparison. The assessee carried out search to identify the external comparable for benchmarking its MS and TS. Under the head MS the OM was worked out. So, he held that import of raw material was at arm's length. For TS the assessee furnished margins of comparable as under identifying eleven comparables and the table read as under: Company Name Sales NPM Source Anukaran Commercial Enterprises Ltd. 5.38 0.29 Annual Report Chembond Drew Treat Ltd. 28.38 12.30 Prowess Dhoot Industrial Finance Ltd. 54.08 -0.43 Annual Report Guljag Industries Ltd. 65.61 3.97 Prowess Hiran Orgochem Ltd. 39.95 0.72 Annual Report Indokem Ltd. 42.37 6.17 Annual Report K.P.L International Ltd. 26.43 17.26 Annual Report Nikhil Adhesives Ltd. 28.41 1.65 Annual Report P.H. Trading Ltd. 49.11 2.50 Annual Report Priy....
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...., that he arbitrarily rejected the said comparables, that the TPO had not challenged FAR, that it was a valid comparable as far as trading of chemicals is concerned. About PIL, he stated that turnover of the company was Rs. 4.18 crores, that the TPO had arbitrarily rejected it as a valid comparable. Referring to RL it was argued that the turnover of the company was Rs. 3.35 crores. Rest of the arguments were similar to the arguments advanced for the first comparable. He stated that if ACEL, PIL and RL were included in the final seven comparables of the TP order the margin of the 10 comparables would work out to be 4.51% even if combined trading margin of the assessee i.e.0.17% was considered, that the same would fall within +5% range, that internal TNMM was the MAM, that Dhoot was into trading of chemicals and other products, that while applying TNMM product similarity was not required, that KPLIL was also into various business, that for the purpose of consistency if Dhoot was to be rejected KPLIL should have also been rejected, that segmental results for KPLIL for indenting and trading showed an income of Rs. 32.24 crores of which traded chemicals revenue was only Rs. 17 crores, t....
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....nd argued that the assessee had fairly and reasonably prepared the segmental profit and loss account between the manufacturing and TS based on the financial information captured by the internal financial reporting system of the Company for those segments, that the assessee had given a proper reconciliation to the TPO of the profit as per the segmental financial split and the profit as per audited financials which clearly evidenced that all the items of operating income and expenses had been considered and accounted while preparing segmental financial split, that for application of TNMM it was not necessary that there had to be identity of products-rather functional comparability was essential, that the AE and non-AE segment of the assessee dealt in manufacture of agro chemicals, that both the segment under the manufacturing function were functionally similar, that the internal TNMM analysis conducted by the assessee was correct. , that the TPO had accepted the broad segmentation of the assessee between Manufacturing and Trading activities, that on the very same basis it had further dissected the Manufacturing and Trading activities into AE (associated enterprises) and Non AE segmen....
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....nducted by the assessee was correct, that intending commission and export incentive formed only 0.2% of the total turnover, that those expenses were not at all material to vitiate the segmental profitability, that the correct figure of manufacturing services was 70.33 crores and not 700.33 crores as reported by the TPO, that the profit disclose was Rs. 22.07 lakh and not 22.07 crores as held by the TPO, that separate books of a/c.s were maintained for the manufacturing services, that same had been separately disclosed in segmental results, that the TPO and the DRP had accepted the IT.s. of MS, that no addition has been made for SAP services, that the TPO had made upward adjustment with regard to TS only and the DRP had confirmed it, that the assessee had applied internal TNMM for determining the ALP of the transactions it had entered in to with its AE.s., that the operating margin in the TS was 0.17%, that the weighted averaged arrived at by the assessee, using multiple year data, was 3.67%, that initially eleven comparables were selected, that in the final list of comparables only seven companies were picked up. We find that the assessee had specifically advanced the issue that....
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.... of subscription and club membership as a deduction after examining the details, that in the final assessment order the AO held that the assessee had taken a corporate membership of the clubs, that it would give enduring benefit to the assessee, that the expenses were towards payment of membership fees and annual subscription charges as well as towards the cost of services, that the expenditure was capital in nature, that he had not followed the directions of the DRP, the directions of the DRP were binding, that assessee had paid club membership exclusively and wholly for the purpose of business, that club membership only facilitated assessee to conduct its business more smoothly and efficiently. He relied upon the cases of Otis Elevators Company (India)Ltd. (195ITR682), Samtel Colour Ltd. (326 ITR 425), Infosys Technologies Ltd. (349 ITR 582). The DR left the issue to the discretion of the Bench. 3.2. We have heard the rival submissions and perused the material before us. We find that the assessee had claimed expenditure towards payments made to club on account of subscription and membership, that the AO decided to disallow the expenditure, that the DRP directed the AO to allow....
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....res was in a subsidiary, that an investment of Rs. 20.48 lakhs were made out of compulsion, that those investments were made as per the requirements of the local authorities, that the investments were made out of commercial expediency and not with intention of exempt income, that the assessee itself disallowed a sum of Rs. 2.80 lakhs as expenditure incurred towards earning of exempt income, that the AO had neither controverted not recorded any objective satisfaction with regard to expla -nation offered by the assessee. He relied upon the cases of HDFC Bank Ltd. (ITA.330 of 2012 of the Hon'ble Bombay High Court), Reliance Utilities and Power Ltd. (313 ITR 340), JM financial Ltd (ITA/4521/Mum/2012) Piem Hotels Ltd. (ITA/240/Mum/2012 and Bayer Bioscience(P)Ltd. (51 SOT 16). The DR stated that matter could be decided on merits. 4.2. We have heard the rival submissions and perused the material before us. We find that during the year under consideration the assessee had received dividend income of Rs. 37.51 lakhs, that it explain to the AO that dividend warrants were deposited into bank accounts in a routine manner along with the other checks, that the assessee had sufficient own fund....
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....ount the assessee did not become owner of any capital asset, that fixed capital did not get enhanced by incurring of such expenditure, that same ought not to be treated a capital expenditure, that the expenditure resulted in smooth conduct of assessee's business. Alternatively , it was argued that the expenditure should be allowed as per the provisions of section 35 of the Act. The DR argued that assessee was not carrying out the research activities itself, that the government approved institutions were doing the job on behalf of the assessee, that expenditure could not be allowed as revenue expenditure. 5.3. We have heard the rival submissions and perused the material before us we find that while dealing with the objections filed by the assessee for the a why 2007-08 the DRP had allowed the direction under section 35 of the Act. In our opinion, the test to decide the nature of the expenditure i.e. capital or revenue expenditure the basic thing to be seen is as to whether the expenditure is for running the business of the assessee smoothly. If the expenditure is incurred for day-to-day business activities of the assessee and not for acquiring some asset it has to be allowed as r....
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....tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time to time based on the requirements of the assessee in the context of advancement of its amendments by law or by professional bodies like the Institute of chartered accountants of India, which are given the responsibility of conceiving and formulating the accounting standards from time to time, and perhaps also, by reason of the fact that expenses may have to be incurred on account of corruption of the software due to unintended or intended ingress into the system-what not give a colour to the expenditure incurred is one on capital account. Given the fact that there are myriads factors which may call for expenses to be incurred in the field of software applications, it cannot be said that either the extent of the expense or the expense being incurred in close proximity, in the subsequent years, would be conclusively determinative of its nature. The Assessing Officer has erred precisely for these very reasons. The contention of the revenue that in the books of accounts the assessee had not written off the expenses in issue while in succeed....
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....L, that it appointed a consultant to conduct a fair and independent valuation in order to take well-informed decision, that on the basis of television report and amount of Rs. 2.96 crores was determined as a compen - sation to terminate the agreement on mutual consent, that the compensation was paid for non-lifting of agreed quantity of raw material from PPICSL, that the payment was of revenue nature, that the expression wholly and exclusively did not mean necessarily, that the expenditure was incurred for furthering that rate/business interest of the assessee. He relied upon the cases of Jamna Auto Industries(167 Taxman 192), Indo Asian Switchgears Private Ltd. (222 ITR 757) and Microsoft Corporation of India Private Ltd. (ITA 111 of 2008 of Hon'ble Delhi High Court).The DR supported the order of the AO and the DRP. 7.3. We find that the assessee had entered into an agreement with PPICSL to manufacture certain amount of raw material, that due to adverse market conditions it could not lift the goods from PPICSL, that it appointed a value of two determine the compensation to be paid to PPICSL, that the AO and DRP dated the said expenditure as capital expenditure. In our opinion, ....