TaxTMI 
TaxTMI 
2022 (2) TMI 1186
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....Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The controversy concerning the Departmental appeal is qua the 'Receipt of Commission' amounting to Rs. 44,29,79,820/-. The assessee applied the Transactional Net Margin (TNMM) method for demonstrating the international transaction at ALP. The TPO noticed that the amount of commission charged by the assessee varied between 3-20% of the sale value of the products of the Associated Enterprises sold through the assessee. Taking cognizance of the fact that the assessee was also engaged in sale of its own manufactured goods, the TPO proceeded to determine the ALP of the Commission income w.r.t. the compensation for marketing effort in the sale of the assessee's own manufactured goods. Rejecting the TNMM, he resorted to 'other method' as per Rule 10AB of the Income-tax Rules, 1962. In the hue of this method, he considered the figure of the assessee's total cost under the Manufacturing function at Rs. 1841.00 crore with corresponding revenue of Rs. 2075.81 crore. He considered the individual items of Marketing and Ma....
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....have been charged or paid. 5. The TPO worked out the amount of transfer pricing adjustment at Rs. 8.52 crore with the help of the following table given at pages 12 and 13 of his order: Total costs as above 1,841.00 Marketing expenses related to sale of product 87.84 Marketing Expenses as % of Total Costs 4.77% Manufacturing expenses 339.59 Manufacturing expenses as % of total cost 18.45% Overall profit of the company 257.41 Profit attributable to marketing and manufacturing function is in the ratio of 20.55 to 79.45 Portion of profit attributable to marketing function (20.55% of 257.41) 52.90 % Marketing profit to sales (Rs. 52.90 crores/2075.81 crores) 2.55% Sales value of product sold by AE in India 532.78 Marketing profit to be earned from sale of AE's product (2.55% of 532.78 crores) 13.58 Add : Expenditure incurred by the company on sale of AE's products 39.24 Amount of commission to be received 52.82 Amount of commission actually received 44.30 Amount of commission less received 8.52 6. The basic figures of this Table were picked up by the TPO from those supplied....
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....Consumption at Rs. 1370.81 crore; Manufacturing expenses at Rs. 339.59 crore; Administrative Selling and Distribution expenses of Rs. 87.84 crore; and Depreciation at Rs. 42.77 crore. Total of these four items is Rs. 1841 crore, which is the opening figure in the table drawn by the TPO for determining the ALP. Out of such four costs aggregating to Rs. 1841 crore, the TPO considered only Marketing expenses at Rs. 87.84 crore and Manufacturing expenses at Rs. 339.59 crore in his computation of profit and thus ignored the other two expenses, namely, Material Consumption cost of Rs. 1370.81 crore and Depreciation of Rs. 42.77 crore. In this manner, the TPO computed operating profit relatable to Manufacturing and Marketing costs in the ratio of 4.77% : 18.45% as extrapolated to 20.55 : 79.45. That is how, he ascribed the share of profit from the Marketing expenses in the overall kitty of profit from the Manufacturing segment of the assessee at Rs. 52.90 crore in quantitative terms and 2.55 in percentage terms. It is here that he went off the track. While attributing profit to Marketing function from the assessee's own manufacturing activity, the TPO considered only two expenses, nam....
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.... into vogue, as per Rule 10AB, only from the A.Y. 2012-13 under consideration and the assessee has not objected to the application of this method. This method obviously could not have been nor has actually been applied by the assessee or the TPO in any of the earlier years. There can be no denial that different amounts of the ALP emerge under different methods. Secondly, for the earlier years, the amount of Sale considered by the Revenue for determining the ALP consisted of sale of manufactured goods; sale of traded goods and commission. Au contraire, the amount of sale at Rs. 2075.81 crore considered in the entire exercise for the year under consideration is only of manufactured goods and has no components of traded goods or commission. In that view of the matter, the findings given by the Tribunal for such earlier years do not per se apply to the year under consideration. However, in view of our discussion made above pointing out infirmities in the TPO's ALP determination, we hold that the transfer pricing addition under `other method' as per rule 10AB was not justified, which has been rightly deleted in the first appeal. 9. Now we espouse the appeal of the assessee in....
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....d is for allowing deduction towards Education Cess. Relying on the judgment rendered by the Hon'ble jurisdictional High Court in Sesa Goa Lt. Vs. JCIT (2020) 423 ITR 426 (Bom.), the ld. AR submitted that the claim for Education Cess cannot be disallowed in terms of section 40(a)(ii) of the Act. It was further submitted that the Tribunal in earlier years has also allowed the assessee's similar additional ground. 12. Having heard both the sides and gone through the relevant material on record, it is seen as an admitted position that the Tribunal in the assessee's own case for earlier years has allowed such additional ground by relying on the judgment of Hon'ble jurisdictional High Court in Sesa Goa Ltd. Vs. JCIT as well as the judgment of Hon'ble Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd. and Another Vs. JCIT (2018) 102 CCH 0202 (Raj-HC). However, it is pertinent to note that the Finance Bill, 2022 has proposed an amendment to section 40(a)(ii) by insertion of Explanation 3 w.e.f. 01-04-2005, reading as under: "Explanation 3 - For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term 't....
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.... net effect of the above discussion is that the AO capitalized 80% of the expenditure and granted depreciation thereon, which was reduced by the Ld. CIT(A) to 40%. The Ld. AR contended that the AO, after capitalizing 80% of the amount of repairs for the assessment year 2004-05 and granting depreciation thereon, did not increase the corresponding value of block of assets for the next year onwards. Ordinarily, if a particular amount is capitalized by the AO and depreciation is granted in that year, the value of block of assets is accordingly increased for subsequent years as well and depreciation at the enhanced value is granted. If the action of the AO of capitalization is partly modified and the extent of capitalization is reduced, then amount of depreciation granted on the higher value of block of assets by considering the original amount disallowed by the AO, requires corresponding reduction in the claim of depreciation. If such is the position, then the amount of depreciation for the subsequent years should be rather reduced. 16. Adverting to the facts, when the Ld. CIT(A) reduced capitalization of building block from 80% to 40% which got echoed by the Tribunal, then the depr....
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....justment of Rs. 71.00 lakh on account of difference in price of the products sold to AEs as well as non-AEs by applying the CUP method. 20. The facts of this ground are that the assessee declared an international transaction of 'Export of Manufactured goods' amounting to Rs. 266,75,78,996/-. The AO accepted the ALP of the international transaction to the extent of exports amounting to Rs. 263.91 crore. For the remaining amount, the TPO observed that the price charged by the assessee from its AEs was inadequate vis-à-vis that charged for similar goods from non-AEs. Applying the CUP method to that extent, he proposed transfer pricing adjustment of Rs. 71.00 lakh, which was made by the AO and thereafter confirmed in the first appeal. 21. Having heard both the sides and gone through the relevant material on record, it is seen that similar point came up for consideration before the Tribunal in earlier years and for the first time in relation to the assessment year 2005-06. The Tribunal discussed this issue in para Nos. 5 to 10 of its order, a copy placed at page 159 onwards of the paper book, and in the final analysis sent the matter to the AO/TPO for fresh determin....