TaxTMI 
TaxTMI 
2016 (12) TMI 454
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....e treated as return filed in response to notice u/s 148 of the Act. Accordingly re-assessment u/s 143(3) r.w.s. 147 of the Act was finalized on 31.12.2007 at Rs. 94,33,166/- after making addition of Rs. 21,78,003/- to the previously assessed income u/s 143(3) r.w.s. 148 of the Act on 31.3.2006. 3. In appeal before the first appellate authority assessee partly succeeded. Aggrieved, assessee is now in appeal before the Tribunal raising various grounds. 4. Ground no.1 which reads as below has not been pressed by the assessee and, therefore, the same is dismissed as not pressed. 1. The learned Commissioner of Income Tax (Appeals) UCIT (A)" erred in fact and in law in confirming the action of the AO in reopening the assessment by invoking the provisions of section 147 of the Income Tax Act, 1961 and completing the assessment, commenced under invalid and improper exercise of powers u/s 147 of the Act. 5. Ground no 2. Reads as follows :- 2. The learned CIT (A) erred in fact and in law in confirming the action of the AO in holding that the following items of income are not derived from industrial undertaking and therefore the Appellant is not entitled to deductio....
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....in the Eleventh Schedule" had been omitted. Explanation l.-For the purposes of clause (II)t any machinery or plant which was used outside India by any person other that the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant Is Imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2.- Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty percent of the total value of the machinery or plant used in the business then, for....
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....tioned in the Audit Report. The assessee Is asked to provide all necessary details for clear bifurcation of trading and manufacturing activities with attendant details of income and allocable expenses, so that only the manufacturing profits are allowed for deduction u/s. 80IB. In the case of Kashmir Art vs. CIT 213 CTR 421 (Del) it is held that interest on the FDRs kept as margin money is not business income. Thus, the same has to be excluded for the purpose of 80IB deduction. Ground No. 2, 3 & 4 are partly allowed and ground No. 5 is dismissed. 9. From going through the findings of ld. CIT(A) we observe that assessee is having some trading activities also along with manufacturing and ld. CIT(A) has directed the Assessing Officer to carry out necessary verification to calculate the profits attributable to the manufacturing activities only which are eligible for deduction u/s 80IB of the Act. As regards the claim of assessee for allowing deduction u/s 80IB for interest on fixed deposit given as margin money towards secured/credit from bank we observe that to the extent if the interest is from such fixed deposit which have been used to get the working limits from bank, judgment of....
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....is ground along with ground no.2 above in his appellate order. In this ground limited issue before us is that as to whether gross interest or net interest is to be excluded from the profits for the purpose of calculating deduction u/s 80IB of the Act. We find that Hon. Supreme Court in the case of ACG Associated Capsules (P) Ltd. vs. CIT (supra) while adjudicating the issue relating to deduction u/s 80HHC has held as follows :- Explanation (baa) to section 80 HHC states that 'profits of the business' means the profits of the business as computed under the head 'Profits and Gains of Business or Profession' as reduced by the receipts of the nature mentioned in clauses (1) and (2) of the Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the head 'Profits and Gains of Business or Profession1 in accordance with provisions of sections 28 to 44D. In the computation of such profits of business, all receipts of income, which are chargeable as profits and gains of business under section 28, will have to be included Similarly, in computation of such profits of business, different expenses which are allowable under....
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....f any quantum of any receipt of the nature mentioned in clause (1) o/Explanation (baa) has not been included in the profits of business of an assessee as computed under the head 'Profits and Gains of Business or Profession', ninety per cent of such quantum of the receipt cannot be deducted under Explanation (baa) to section 80HHC. [Para 11] Therefore, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under section 28, and if any quantum of the rent or interest of the assessee is allowable as an as an expenses in accordance with sections 30 to 44D and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) o/Explanation (baa) to section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head 'Profits and Gains of Business or Profession', is to be deducted under cla....
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.... appellant as provided under proviso to section 92C(2) of the Act. The CIT(A) failed to direct the AO not to make any addition despite the fact that the arm's, length price as worked out by the AO and that worked out by the appellant did not exceed the limit of 5 % as stated in proviso to section 92C(2). 16. Brief facts in relation to this ground are that assessee entered into international transaction covered by section 92B of the Act which is supported by report in form 3CEB r.w.s.92E of the Act, As per this report assessee entered into international transaction with its Associated Enterprise (AE) namely- Liquid Controls Inc.(LCI) which is holding company having 26% voting power in assessee company and is associated enterprise in terms of clause (a) of section 92A(2). It will be worthwhile to discuss the product in which assessee deals in. The assessee i.e. LCIPL deals in high accuracy custody transfer liquid measurement and oil delivery equipments including aircraft refueling, LPG delivery equipment which are manufactured by Liquid Control Inc. or LCIPL itself. During the course of assessment proceedings assessee submitted a report on transfer pricing study of LCIPL for FY 20....
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....ist of comparables were provided by assessee itself and Bhartia Industries Ltd. is dealing in electronic devices which is similar to assessee's product & Roop Telsonic Ultrasonix Ltd. is manufacturing electronic devices to measure speed of flow of liquid control level, which is also similar to that of assessee. 19. Ld. Assessing Officer further observed that filters selected by the assessee to choose comparables by eliminating all companies engaged in the business other than manufacturing is incorrect as the assessee is engaged in both the manufacturing and trading activities. Accordingly the Assessing Officer applied the difference of the average operating sales ratio of 7.27% as against operating/sales ratio of 3.73% shown by the assessee and applied the difference of 3.54% [7.27% (-) 3.73%] on the total turnover of the assessee and made addition of Rs. 26,39,609/- to the arms length price u/s 92C(3) of the Act. 20. In appeal before ld. CIT(A) challenging the impugned addition of Rs. 26,39,608/- assessee also contended that the arms length price calculated by ld. Assessing Officer is not more than 5% of the value of international transaction thereby leaving no question to e....
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.... Bhartia Industries Ltd. (engaged in manufacturing of Motor Control Gears), Indfos Industries Ltd. (engaged in manufacturing of Hydraulic Systems and also Pressure and Temperature Controllers) and also Roop Telsonic Ultrasonlx Ltd.. (dealing in Accessories to amplifier, Ultrasonic Cleaner and also in Ultrasonic plastic welding machines.) iv. Rather than following systematic base, the AO has already adopted selective approach to identify comparables as it is revealed from wide variation in the PLI of four comparables arrived by the AO. v. Total transactions with associate enterprise do not exceed even 20% of total amount of similar transaction. In such a situation If addition Is made in the manner as laid In the order then such addition would exceed even gross taxable come offered by the appellant. 21. Ld. CIT(A) observed that out of the four surviving set of comparables are Bhartia Industries Ltd. 5.68%, Indfos Industries Ltd. 6.28%, Daniel Measurement 5.38% and Roop Telsonic 11.75% rejected Roop Telsonic Ultrasonic Ltd. 11.75% operating margin (being much higher) and accepted the remaining three as were having the operating margin between 5.68% to 5.38% and on....
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....rement 5.38 Roop Telsonic 11.75 6.3.1. It is noticed from above that 3 of the 4 comparables are closely bunched in the OP/Sales ratio of 5.3 - 6.3% and in my view this band represents the most probable OP/Sales Margin for comparison with the appellant case. The average ratio of the relevant group is 5.78% and as against that the appellant margin is 3.73%. Accordingly, the addition to the extent of difference of 2.05% on the total sale of about Rs. 7.4565 crores is Rs. 15,28,582/- is confirmed. Ground no.6 is partly allowed." 22. Aggrieved, assessee is now in appeal before the Tribunal. 23. Ld. AR submitted that assessee company which is engaged in the business of manufacturing and sale of positive displacement mass flow meters, pumps and turbine is 100% subsidiary company of Liquid Controls Inc. incorporated in USA (LCI) and part of Idex Corporation Group which has substantial experience, know-how and market presence, the manufacturer of positive displacement , mass flow meters, turbine and pumps etc., Assessee i.e. LCIPL has entered into cross border transactions with the LCI with regard to import of components and finished goods from LCI, export ....
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....nsaction (Rs. In crores) A 3.28 3.17 Assessee's margin (% of sales) B 3.73% 3.73% AO's margin (% of sales) C 7.27% 7.27% Difference to be added to income of assessee D=C-B 3.54% 3.54% ALP @ 103.54% (Rs. In crores) E=A+(A*D) 3.40 3.28 95% of ALP (Rs. In crores) F=E*95% 3.23 3.12 105% of ALP (Rs. In crores) G=E*105% 3.57 3.45 Value of international transaction is within range of +5% 3.28 3.17 26. On the other hand, ld. DR vehemently argued and supported the orders of lower authorities and also to the working of ld. CIT(A). Ld. DR submitted that the appeal of the department has already been dismissed due to low tax effect and submitted that power of TPO to select comparables is not limited to the document but has also the power to other source in order to find out the comparables and urged urge that the order of ld. CIT(A) should be upheld. 27. We have heard the rival contentions and perused the record placed before us. Assessee is aggrieved with the action of ld. CIT(A) sustaining the addition of Rs. 15,28,552/- u/s 92C(3) of the Act. We do not consider to reite....
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....ra ting Margini 3,362,924 Sales 74,565,221 Operating Margin (%) 4.51% 29. As against the revised operative margin of 4.51% ld. CIT(A) has upheld 5.78%. On going through the three comparables of which operating profit margin has been taken by CIT(A), we find that Bhartia Industries Ltd. is engaged in the business of electronic device, Indfos Industries Ltd. is manufacturing of Hydraulic Systems and also Pressure and Temperature Controllers and so is Denial Measurement Ltd. We also observe that during the course of assessment in the list of comparables given by assessee it has itself included Bhartia Industries Ltd. Further no objection has been raised before the lower authorities against the inclusion of Danial Measurement Ltd. We are, therefore, of the view that to the extent of selection of comparable we upheld the decision of ld. CIT(A) for taking three companies Bhartia Industries Ltd., Indfos Industries Ltd. & Danial Measurement Ltd. having average operating profit/sales margin of 5.78%. Now the issue as to whether differential operating profit margin which is in this case is 2.05% is to be applied on the total turnover of assessee or should be restr....
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.... (c) The Revenue being aggrieved submits that the adjustment has to be made on the entire universe of transactions entered into by the Respondent Assessee and not restricted only to its International Transactions with Associated Enterprise. In support, reliance was placed upon the fact that two appeals filed by the Revenue being Income Tax Appeal No.298 of 2013 (The Commissioner of Income-tax v. Super Diamonds) and Income Tax Appeal No.2068 of 2011 (The Commissioner of Income Tax v. Ankit Diamonds) raising a similar issue have been admitted on 5th May, 2014 and 16th February, 2015 respectively. On the other hand, the Respondent Assessee invites our attention to the decision of this Court in C/7" v. Tara Jewels Exports (P.) Ltd. [Income Tax Appeal No. 1814 of 2013, decided on 5th October, 2013] and C/7~v. Keihin Panalfa Ltd. in ITA No, 11 of 2015 decided on 9th September, 2015, wherein the view taken by the Tribunal in the impugned order has been approved. (d) Chapter X of the Act inter alia deals with computation of income from international transactions having regard to the ALP. Section 92 thereof specifically brings to charge income arising from International Transacti....
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....stance in the alternate plea for being covered by proviso to section 92C(2) of the Act. We find that assessee has declared net operating profit margin of 3.73% during the course of assessment proceedings and thereafter has submitted a revised calculation of operating profit margin discussed above in para 28 and calculated at 4.51%. As against this ld. Assessing Officer made addition to the returned income of assessee by applying 7.27% operating profit margin being average of comparables selected by him which was sustained to 5.78% by ld. CIT(A). From going through these figures we find that the difference of operating profit margin at which the international transaction has actually been undertaken as against arm's length price determined by Assessing Officer is within tolerance range of (+/-) 5% as provided in proviso to section 92C(2) of the Act. We are, therefore, of the view that in the given facts and circumstances, the price at which international transaction has actually been undertaken shall be deemed to be arm's length price and we accordingly set aside the order of ld. CIT(A) sustaining addition of Rs. 15,28,582/-, delete the impugned addition and allow the ground of asse....
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....ctated by performance and the appellant ought to have justified the remuneration In terms of services rendered, terms of employment, performance of the company etc. Otherwise, the comparison with the earlier year is a fairly good estimate. The decision cited by the appellant is distinguished of the facts as that in the case the details of nature and extent of service justified the increase in remuneration. The appellant insisted that the details are available and In fact were also discussed with the AO. In view of these facts, the AO Is directed to verify the details provided by the appellant and inter-alia parameters suggested above, to ascertain whether the remuneration is justified. Ground No. 12 is allowed subject to verification by AO. 33. Aggrieved, assessee is now in appeal before the Tribunal. Ld. AR submitted that MD was paid a salary inclusive of bonus and commission at Rs. 31,13,004/- as against Rs. 15,44,004/- in the immediately preceding F.Y. MD is not a person covered under the provisions of section 40A(2)(b) of the Act which even not disputed by Revenue also. Increase in the remuneration was mainly on account of bonus at Rs. 4,05,000/- and commission of Rs. 9,12,0....
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....ly firm, of member if the association or family, or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession,- (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons....
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....the case of Jagdama Rollers Flour Mill Ltd. vs. ACIT (supra)by observing as under :- Provisions of s. 40A are non obstante provisions and, therefore, have an overriding effect over the other provisions allowing the deductions. This provision presupposes allowability of the expenditure otherwise. If the expenditure is not allowable under the provisions of ss. 28 to 39 then the question of making disallowance under s. 40A would not arise. It is only in these cases where the deduction is allowable under ss. 28 to 39 but the expenditure is found to be excessive or unreasonable, the disallowance under s. 40A can be made if payment on account of expenditure is made to the persons specified under sub-s. (2)(b) of s. 40A. The expenditure on account of remuneration paid to employees is governed by the provisions of s. 37. According to the said section, the expenditure is allowable if it is incurred wholly and exclusively for the purpose of business. It is not in dispute that such expenditure is otherwise allowable under s, 37. However, a part of the expenditure can be disallowed if it is shown-(i) that the payment was made to the persons specified in cl. (b) of s. 40A(2); and (ii) ....