TaxTMI 
TaxTMI 
2017 (6) TMI 1290
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.... upholding an ad-hoc disallowance u/s.l4A of Rs. 1,00,000. Ld. CIT (A) erred in upholding that a disallowance u/s. 14A was warranted when an Appellant could show that. (a) it has sufficient interest free funds available to it (b) its claim was in accordance with the ruling of Reliance Utilities & Power Ltd. 313 ITR 340 (c) its investments were in a Group company Sandvik Steel Asia Private Ltd. and had no relevance to the issue of Sec. 14A. 3. The Ld. CIT (A) erred in confirming the disallowance of excise duty of Rs. 60,000 which have been included in the valuation of closing stock and actually paid before the due date of filing of the return. 4. The Ld. CIT (A) erred in confirming an adhoc addition of Rs. 75,000 by valuing stock of scrap as of 31.03.2005. The Ld. CIT (A) failed to appreciate that it was a consistent accounting policy of the assessee not to value any scrap at the end of each year in view of insignificant value involved. Further the CIT (A) failed to appreciate that as and when the scrap was sold and the proceeds have been offered for tax by the appellant and hence the action of the AO/CIT (A) amounts to a double addition/taxation. ....
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....elf agreed that the TPO has provided adequate time to the assessee for submission of evidence and without establishing the reasonable cause which prevented the assessee from furnishing such evidence before the TPO during TP proceedings? 2a. Whether on the facts and in the circumstances of the case, the Ld.CIT (A) was justified in deleting the adjustment made to international transaction of management Service fees amounting to Rs. 4,41,44,973/- ignoring the finding of the TPO and the Assessing Officer that no evidence in support of the claim was furnished by the asseessee during the course of TP proceedings? 2b. Whether on the facts and in the circumstances of the case, the Ld.CIT (A) was justified in deleting the adjustment made to international transaction of management service fees amounting to Rs. 4,41,44,973/- ignoring the finding of the DDIT(International Taxation)-I, Pune in the case of parent AE of the assessee company i.e. Sandvik AB, Sweden for the A.Y. 2005-06 that the said amount was received by Sandvik AB Sweden without providing any services to Sandvik Asia Pvt Ltd., which was also relied on by the TPO while determining the Arms' Lengt....
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....rt 'the Rules'), worked out the disallowance at Rs. 4,52,000/-. 8. The CIT (A) restricted the disallowance to Rs. 1 lakh, against which the assessee is in appeal. 9. The assessee is aggrieved by the observations of the CIT (A) in para 2.8.11 in holding that the assessee has to establish that it is entitled to full exemption where Rule 8D of the Rules is based on presumption and the calculation of expenditure is also on presumptive basis. The CIT (A) later on disallows the amount at Rs. 1 lakh, in the absence of application of Rule 8D of the Rules. 10. We have heard the rival contentions and perused the record. Admittedly, the year under appeal is assessment year 2005-06 i.e. the year when the provisions of Rule 8D of the Rules were not on Statute. The Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/ had held the said provisions to be prospective in nature, hence the same were not applicable to the year under appeal. Accordingly, the findings of CIT (A) in para 2.8.11 needs to be reversed. The CIT (A) himself though in the paras thereafter have admitted that the provisions of Rule 8D of the Rules are not applicable and in v....
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.... appeal No.2 raised by the assessee is thus, allowed." 15. Following the same parity of reasoning, we allow the claim of assessee and ground of appeal No.3 is thus, allowed. 16. Now, coming to the ground of appeal No.4 raised by the assessee against adhoc addition of Rs. 75,000/- by valuing the stock of scrap as on 31.03.2005. 17. The assessee explained that it was its policy not to value any scrap at the close of the year and the said policy was consistently followed from year to year. However, the sale proceeds of the scrap were offered to tax when the same was sold. The Assessing Officer noted that the closing stock of assessee included scrap of 14,984 kgs. but its value was not considered. The assessee claimed that the value was insignificant to be considered as part of closing stock. The Assessing Officer however, made an addition of Rs. 12,66,148/- on account of value of closing stock of scrap. 18. The CIT (A) restricted the addition to Rs. 75,000/- by revaluing the stock @ Rs. 5 per Kg., estimated on adhoc basis. 19. The learned Authorized Representative for the assessee referring to the pages 144 and 156 of the Paper Book, pointed out that during the year con....
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..... The total turnover of the assessee for the year ending 31.03.2005 was Rs. 568 crores, on which the assessee had declared net profit before tax at Rs. 113.26 crores. The assessee was subsidiary of Sandvik AB, Sweden. The assessee had entered into various international transactions which are tabulated at page 2 of the order of TPO. For benchmarking the international transactions, the assessee had divided the activities under four heads as under:- (i) Manufacturing Tools Division - Manufacturing of machine cutting tools needed for drilling and machining were classified under this division; (ii) Manufacturing wires function - Manufacture of high resistance electrical wires, ribbons and heating elements were categorized in this division; (iii) Manufacturing Seamless Tubes and Pipes function; and (iv) Distribution - Import of finished goods for resale in the Indian market and performance of sales agent service have been categorized in this division. 25. The assessee had applied TNMM method with net profit margin as the Profit Level Indicator (PLI) in order to benchmark the arm's length price of its aforesaid four divisi....
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....e CIT (A), the plea of assessee was that CPM cannot be considered as most appropriate method because there were controlled transactions in both associated enterprises and non-associated enterprises transactions. Further, there were differences in functional and risk adjustment between associated enterprises and non-associated enterprises segments. The CIT (A) rejected the plea of assessee that associated enterprises and non- associated enterprises segment could not be compared. The CIT (A) held that the assessee has failed to bring on record the extent of expenses of controlled transactions in non-associated enterprises segments. Further, the arguments of assessee to allow adjustment on account of geographical differences were also rejected in the absence of any details filed by the assessee. The CIT (A) thus, upheld the adjustment of Rs. 6,25,621/- made to the international transactions of manufacturing of wire. 28. The assessee is in appeal against the order of CIT (A). 29. The learned Authorized Representative for the assessee pointed out that 90% of its sales were in the domestic market. The learned Authorized Representative for the assessee further stated that the total ....
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.... was that where import / service charges / management fees, etc. were the controlled transactions in respect of both the activities, then both were tainted and CPM method could not be applied to compare the results shown in the domestic market with the results shown of export to associated enterprises. The assessee had declared gross profit of 32.59% against domestic sales and 19.13% against the export sales to associated enterprises and the TPO had applied the difference of 13.46% to work out the addition in the hands of assessee. 32. The first aspect of the issue raised before us is the aggregation approach to be applied while benchmarking the transaction of manufacturing of wires. Where the international transactions undertaken by the assessee under the division of manufacture of wires are inter-linked, then the said transactions need to be aggregated for the purpose of benchmarking the arm's length price of the said international transactions. The aggregation approach has been accepted in the hands of assessee both in the earlier years and also later years. The learned Authorized Representative for the assessee has pointed out that in assessment years 2002-03 to 2004-05,....
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....st 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 that it had exported tractors to AEs for last several years and the assessee has adopted TNMM method as the most appropriated method for determining the ALP in respect of the transaction of export of tractors to the AEs from A.Y. 2004-05. The said contention of the assessee has not been disputed before us by the Revenue. Admittedly, for all those assessment years starting from 2004-05 onwards and also for the A.Y. 2008-09 the Assessing Officer has accepted the TNMM method as a most appropriate method for determining the ALP in respect of the sale of tractors by the assessee to the AEs. The assessee has filed the copies of the assessment order for the A.Ys. 2004-05 and 2005-06 which are pl....
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....ted by the assessee is a correct appropriate method or CUP which is applied by the TPO. This issue stands covered in favour of the assessee by the decision of the ITAT, Pune in the case of Drill bits International Pvt. Ltd. (supra). In the said 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. 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, ....
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....sion of the assessee treating the same as having no basis. In our view, the apportionment of these costs is justified because major time of the employees is devoted towards the domestic segment. We also find substance in the submission of the learned Authorised Representative that assessee has also to incur selling and administrative expenses, freight expenses, bank interests etc., which cannot be 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 a....
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....dy observed that the assessee has also share in the domestic market and we again compared the parameters of the domestic market with the export market as there is a difference in the export segment and domestic segment on account of credit risks, marketing, warranty, etc. etc. We, therefore, hold that on principles as well as on the rule of consistency, the TPO/DRP are not justified in holding that the CPM is an appropriate 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." 35. Applying the above said ratio to the present facts, we hold that TNNM method is the most appropriate method to be applied to benchmark the international transactions of exports to associated enterprises. The assessee aggregated all the international transactions under this di....
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.... of Seamless tubes and pipes and the application of CUP method was not correct, as the aggregate sale value of such sale to associated enterprises was just Rs. 4.49 crores, which was less than 6% of total export of Seamless Tube and Pipes to associated enterprises which were Rs. 82.22 crores. It was further pointed out by the assessee before the TPO that the total transactions where CUP details were available, the aggregate sales value of export to associated enterprises for all such cases, was approximately Rs. 11.74 crores, which was less than 15% of the total sales value of exports of Seamless tubes and pipes to the associated enterprises and hence, in such circumstances, CUP method could not be taken as most appropriate method. The TPO rejecting the submissions of assessee held that there was no merit in the aggregation approach taken by the assessee as the international transactions undertaken by the assessee were different in their nature and scope and their separate evaluation was possible. The TPO held that CUP method takes care of the difference on account of timing pricing in respect of raw material and any other such difference of volume. Thus, average over a larger peri....
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....above. ITA No.1804/PUN/2013 (Revenue's appeal) 41. The issue in grounds of appeal No.1a and 1b is against the admission of additional evidence. The assessee had furnished certain additional evidence before the CIT (A), which was forwarded to the Assessing Officer and the remand report was obtained from the Assessing Officer, the additional evidence was, thus admitted by the CIT (A). Under Rule 46A of the Income Tax Rules, 1962, the CIT (A) is empowered to admit the additional evidence in case the conditions laid down thereunder are satisfied. In the absence of Revenue pointing out any non-fulfillment of the said conditions under Rule 46A of the Income Tax Rules, we find no merit in the grounds of appeal No.1a and 1b raised by the Revenue. 42. The issue in grounds of appeal Nos.2a and 2b raised by the Revenue is against the order of CIT (A) in deleting adjustment made to international transactions of management service fees amounting to Rs. 4,41,44,973/-. 43. The learned Departmental Representative for the Revenue pointed out that the assessee had failed to provide the details of benefit received before the TPO and additional evidence is placed at pages 472 to 509 of....
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.... Sandvik group concerns other than Sandvik AB. In other words the evidence produced by the assessee do not show that any service is received from Sandvik AB Sweden. In fact, the management fee agreement is with Sandvik AB Sweden and the entire management fees of Rs. 4.41 crores are paid to Sandvik AB Sweden only." 46. The contention of the TPO was that the services were not provided by Sandvik AB Sweden and in any case, no tangible benefits were derived by the Indian entity from such services claimed to have been provided to the assessee. In reply, the assessee explained that as per the terms of agreement, the services could be provided by Sandvik companies but the management services fees paid to Sandvik AB Sweden, in pursuance to the agreement between Sandvik AB Sweden and the assessee were correctly paid. The relevant part of the agreement reads as under:- * The definition of the term "Providing parties" in the 'Definitions' section of the agreement reads as "All or some of the Sandvik companies, which provide management services" (emphasis supplied) * Sandvik AB represents all the legal units working as "commissionaires" as per the Swedi....
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....t services are provided'. Accordingly, the services provided by the Sandvik group entities is in accordance with the agreement and no adverse inference can be drawn for the same. Therefore, the learned TPO's objection would be without basis in view of the specific provisions in the service agreement. 2.6.25 Secondly, I find that the learned AO has taxed the same amount as a management service fees in the hands of recipient i.e. Sandvik AB, Sweden. The learned AO has questioned rendering of services by stating that most of the e-mails are product information for the Appellant's distribution activity and accordingly the services were not rendered by Sandvik AB. However, he has reached contradictory conclusion and taxed income on account of rendering of management services. In other words, the learned AO has accepted that the income had arisen in the hands of Sandvik AB, Sweden on account of rendering of management services. I find that the learned AO has discussed the taxability of the same amount as dividend on 'without prejudice basis'. Therefore, taxability of the same as dividend is not the main but an alternative stand of the learned AO. Therefore, t....
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..... Therefore, I am unable to accept the earned AO's conclusion that this payment is in nature of dividend. 2.6.28 In view of the above discussion, I am of the view that the action of the learned TPO to determine ALP of the international transactions of the payment of management services as 'nil' cannot be sustained. I delete the addition of Rs. 4,41,44,973 based on the transfer pricing adjustment made by the learned TPO." 50. In the totality of the above said facts and circumstances, where the assessee has established the factum of receipt of management services from Sandvik group entities, in accordance with the terms of agreement entered into by the assessee with Sandvik AB, Sweden and where the additional evidence in this regard was filed before the CIT (A), who in turn, has considered the same and has held that services provided by Sandvik group entities were in accordance with the agreement and were actually rendered by the associated enterprises. He also referred to the order of TPO in remand report, who had not doubted that the management services were not rendered at all but had stated that the same were rendered by group entities and not by Sandvik A....
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....orized Representative for the assessee at the outset pointed out that the issue is squarely covered by the order of Tribunal in assessee's own case relating to assessment year 2004-05. 56. The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer. 57. We have heard the rival contentions and perused the record. Similar issue of allowability of software application expenditure arose before the Tribunal in assessee's own case in various years. In assessment year 2004-05, the Tribunal in ITA No.2469/PN/2012 in the appeal filed by the Revenue along with cross appeal of assessee in ITA No.2448/PN/2012, vide order dated 04.12.2015 had held as under:- '31. Briefly, the facts relating to the issue are that for the year under consideration, the assessee had incurred expenditure of Rs. 41,85,871/- for licence to use computer software for its operations. The assessee had claimed expenditure as revenue expenditure since the amount was used for the purchase of various applications software. The Assessing Officer was of the view that the expenditure incurred by the assessee resulted in enduring benefit and lump sum p....
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....pplication software, the same has to be allowed as a revenue expenditure. In view of the finding of fact arrived at further by the Tribunal that the expenses have been incurred on application software which is for a limited time frame and has to be renewed from time to time, we see no reason to entertain question B as framed by the revenue." 22.1 Respectfully following the decision of the jurisdictional High Court cited (Supra), the order of the CIT (A) on this issue is upheld and the ground raised by the Revenue is dismissed.' 35. The assessee for the year under consideration had also claimed to have incurred the expenditure on application software. However, the claim of the assessee was rejected being of enduring nature. We find no merit in the aforesaid disallowance made by the Assessing Officer in the case of assessee in view of the nature of expenditure incurred and also in view of ratio laid down in assessee's own case in earlier years. We uphold the order of CIT (A) in allowing expenditure incurred by the assessee on application software. The ground of appeal No.1 raised by the Revenue is dismissed.' 58. The issue arising be....
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....ntory as part of closing stock. The grounds of appeal No.4a and 4b raised by the Revenue are thus, dismissed. 63. The ground of appeal No.5 raised by the Revenue is against deletion of addition made on account of estimation of value of closing stock of scrap @ Rs. 5/- per Kg. on adhoc basis. The said issue is linked to the issue raised by the assessee vide ground of appeal No.4 and we have already decided the said issue in favour of the assessee. Accordingly, the ground of appeal No.5 raised by the Revenue is dismissed. 64. The issue raised vide ground of appeal No.6 by the Revenue is against the order of CIT (A) in allowing set off of losses suffered by the newly set up EOU unit against its other business income. 65. The learned Authorized Representative for the assessee pointed out that the said issue is also covered by the order of Tribunal in assessment year 2004- 05, wherein it was directed that the losses of EOU unit can be set off against other business income vide paras 51 to 54 of the said order. The findings of Tribunal are as under:- "51. Now, coming to the second aspect of the issue raised by the Revenue i.e. the losses suffered by newly set up E....