TaxTMI 
TaxTMI 
2017 (8) TMI 282
X X X X Extracts X X X X
X X X X Extracts X X X X
....re proceeding to compute the margins of the comparables and the assessee. 4. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,43,65,596/- made by the AO on account of testing fees. 5. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.4,39,592/- made by the AO on account of computer software expenses treated by the AO as capital in nature. 6. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing." 2. Ground No.1 is general in nature and does not require any specific adjudication. Ground Nos. 2 and 3 is regarding T.P. adjustment made by the TPO/A.O. which was deleted by the CIT(A). 3. Briefly stated, the assessee is a Private Limited Company and wholly owned subsidiary of Gates Rubber Company, US (GRC). The assessee is engaged in manufacture and trading of hose pipes. The assessee manufactures industrial and braided hydraulic hoses, which are used for pneumatic applications, apart from doing imports of spirals and braided hoses for resale in Indian market. The assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e total cost/operating cost while computing the margins of the assessee as well as comparable companies. The Ld. CIT(A) also accepted the said claim of the assessee that the margins of the assessee as well as the comparables should be computed by excluding the depreciation. The Revenue is aggrieved by the impugned order of the Ld. CIT(A) and raised the impugned grounds. 4. The Ld. D.R. has submitted that the depreciation is essential and inseparable part of the operating cost/total cost for the purpose of computing the margins under TNMM. He has further contended that when TNMM was adopted as most appropriate method which was not disputed by the assessee then for the purpose of computing margins in respect of international transactions the depreciation cannot be excluded from the operating cost/total cost. The Ld. D.R. submitted that assessee has not demonstrated any specific circumstances which could justify the exclusion of depreciation from the operating cost/total cost while computing the margins of the assessee as well as comparable companies. He has referred to the details of depreciation and the method of depreciation applied by the assessee as well as comparable companie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O accepted the quantified adjustment as claimed by the assessee while computing the ALP under CUP method in respect of the export made to the A.E. then the CIT(A) is not justified in deleting the adjustment proposed by the TPO and made by the A.O. in respect of these international transactions. He has relied upon the order of the TPO. The Ld. D.R. has relied upon the decision of the Mumbai Bench of the Tribunal in the case of Serdia Pharmaceutical P. Ltd., vs. ACIT 44 SOT 391. He has also relied upon the decision of the Delhi Bench of the Tribunal in the case of ACIT vs. Denso India Ltd., (2013) 33 taxmann.com 89 (Del.Trib.) and submitted that when internal CUP is available then the TPO was justified to apply the same for the purpose of computing ALP in respect of international transactions of export of goods to the A.E. 5. On the other hand, the Learned Counsel for the Assessee submitted that this is third or fourth year of operations of the assessee and further the assessee has set-up a plant for manufacturing of rubber hose pipes which are specifically used in mining process. He has further contended that assessee is manufacturing and selling more than 120 specified rubber pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bility between the transactions and there is no difference of functions or risk analysis between the two transactions i.e., controlled transactions and uncontrolled transactions. Therefore, only when there is no scope of any difference between the controlled and uncontrolled transactions, it is appropriate to apply CUP except for minor differences for which an appropriate adjustment can be made. He has relied upon the series of decisions of this Tribunal in support of his contention on the point that until and unless there is a high degree of comparability between the controlled transactions and uncontrolled transactions, CUP as the most appropriate method cannot be applied. 6. As regards the exclusion of depreciation while computing margins of the assessee as well as the comparables under TNMM the Learned Counsel for the Assessee has referred to the comparative details of depreciation and submitted that the comparable companies have provided the depreciation in respect of the plant and machinery which were under the use for more than 12 years in comparison to the assessee where the plant and machinery was under the use for three years only. Therefore, the assessee has provided ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....6.2. Alternatively, the Learned Counsel for the Assessee submitted that in case depreciation is not excluded for the purpose of computing the margins of the assessee as well as comparables, atleast, adjustment must be given on account of difference of depreciation provided by the assessee as well as comparable companies. 7. We have considered the rival contentions and perused the material on record. The first issue arises in T.P. adjustment is regarding application of TNMM as well as CUP as most appropriate method in respect of two transactions of import of goods and sale of finished products to the A.E. As it is clear from the details of international transactions, the assessee is importing raw material from its A.E. and also making exports of the finished goods to the A.E. Thus the import transaction as well as the export transactions are interconnected and closely linked. The price of export is not free from the impact of the import price. Therefore, the international transaction in respect of import of raw material has direct bearing on the export of goods to the A.E. The TPO has applied TNMM by taking the entire turnover of the assessee and then proposed an adjustment being....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In the case of the assessee, before us, it is claimed that assessee has set-up a new state of art technology plant which is imported from the A.E. and therefore, the depreciation cost of the assessee is very high in comparison to the comparables. We find from the details as provided at page-222 of the paper book that depreciation along with repair and maintenance cost in the case of the assessee is very high in comparison to the comparable companies. One shall keep in mind that the isolated data of depreciation and repair and maintenance may lead to unrealistic results if the other related facts are not taken into consideration. In this case, the assessee has claimed that assessee has set-up a state of art plant for production of the specified rubber products which means the assessee's manufacturing facility is highly automotive in comparison to the comparables. In otherwords, when a manufacturing facility is based on the latest technology and highly automotive then the corresponding cost of wages and salary will come down. Hence, comparing only the depreciation cost of assessee and comparables will not serve the purpose as it will not gives the true and correct picture of the aff....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,43,65,596 by treating the same as fees for technical services as well as capital in nature. On appeal, the Ld. CIT(A) has allowed the claim of assessee and deleted the disallowance made by the A.O. 10. Before us, the Ld. D.R. has submitted that there was no such expenditure in the earlier years and only for the year under consideration the assessee has paid this fee to the A.E. The expenditure was incurred on testing of the product manufactured by the assessee makes it evident that the testing result would be used to improve or to maintain the standard of the product. Therefore, any expenditure which is incurred towards acquiring knowledge which would help the company to achieve the desired level of quality cannot be revenue expenditure and the assessee would certainly have an enduring benefit of this facility of testing its product which is part of the manufacturing process of the assessee. Further, the Ld. D.R. has referred to the agreement and submitted that under the terms of the agreement the A.E. of the assessee is under obligation to preserve all the test reports and records for future use which shows that the assessee has incurred this expenditure for acquiring and gett....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble in the case of the assessee when the transaction was completed prior to the amendment in the statute. Assessee would not be expected to deduct the tax at source on the basis of subsequent amendment. He has relied upon the decision of the Tribunal in the case of Kerala Vision Ltd., vs. ACIT (2014) 35 ITR 81 (Tribu.) (ITAT-Coc.) as well as Raymond Ltd., vs. DCIT (2003) 86 ITD 791 (Mum.). The Learned Counsel for the Assessee has also relied on the decision of Hon'ble Delhi High Court in the case of Director of Income Tax vs. Nokia Networks OY (2013) 358 ITR 259 (Del.) (HC) and submitted that the Hon'ble Delhi High Court has held that the amendment in the statute cannot change the provisions of treaty. Therefore, when the treaty is having an overriding effect then the amendment in the statute becomes irrelevant. 13. We have considered the rival contentions as well as relevant material on record. The assessee has paid testing fee to its A.E. GRC-US in respect of testing of its rubber hose. The A.E. has raised debit note on the assessee in respect of costs/expenses incurred by the A.E. in respect of testing of the product of the assessee. Therefore, it is not a cash of any researc....