TaxTMI 
TaxTMI 
2022 (3) TMI 1133
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....ent Year 2012-13. 2. Both these appeals involve identical issues and were heard together. We deem it convenient to pass a common order. 3. IT(TP)A No.355/Bang/2016 : As far as this appeal for Assessment Year 2011-12 is concerned, the grounds that were pressed for adjudication at the time of hearing were ground Nos.7 to 9 and additional ground No.15 and additional ground on education cess. This additional ground on education cess has been wrongly numbered as ground No.15. Ground Nos.7 to 9 and additional ground No.15 and additional ground on education cess read as follows: 7. The Learned AO / Learned Panel erred in considering Operating Profit ("OP")/Total Cost ("TC") as the Profit Level Indicator ("PLI") instead of OP/Sales without providing any reason for rejecting the PLI used by the Assessee in the TP Documentation, which is incorrect since the controlled transaction is purchase of raw material in the auto manufacturing segment and textile machinery manufacturing segment. Textile Machinery Manufacturing Segment 8. The Learned Panel / Learned AO has erred in considering Hindoostan Mills Ltd. ("Hindoostan") as a comparable company with respect to t....
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....ability. 13. Without prejudice to above, the Learned AO/Learned Panel has erred in not allowing the deduction for long service award paid of Rs. 140,000 and bonus paid amounting to Rs. 3,051,641, while computing the 'book profits' under section 115JB of the Act. 14. That the Learned AO /Learned Panel erred in levying interest under section 234B amounting to Rs. 9,987,318. 5. As far as the grounds relating to determination of ALP of an international transaction is concerned, the facts are that the assessee is a joint venture between Toyota Industries Corporation, Japan holding 95% stake and the balance 5% is held by Kirloskar Systems Ltd., India. The assessee is engaged in the import of raw material and components from the AE for manufacture of textile machinery and auto components. In this appeal, we are concerned with the determination of ALP in the textile machinery segment. As far as manufacture of auto components is concerned, pursuant to the order of the DRP, the only relief which assessee seeks is with regard to computation of Profit Level Indicator (PLI) as done by the TPO which was operating profit on total cost. The assessee seeks PLI to be ope....
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....at in the Textile Machinery Manufacturing segment, the assessee had applied TNMM for benchmarking the transactions with the AE and undertaken a search for comparables and arrived at 3 companies. They were: Comparable Company Average NPI Kusters Calico Machinery Ltd. 5.19% Laxmi machine Works Ltd. 6.98% Batliboi Ltd -3.78% 9. The arithmetic mean operating profit margin of comparable companies turned out to be 2.80%. The financial results of KTTM (the assessee) indicated that the assessee company had an operating profit margin of 5.65% during the year under consideration. Thus, it was claimed that the international transactions of KTTM were in accordance with arm's length standard required under the Indian regulation. 10. The TPO however rejected two of the comparable companies taken by the assessee in the TP study of the assessee. The two comparables rejected by the TPO were: 1. Kusters Calico Machinery Ltd. 2. Batliboi Ltd. 11. The TPO then undertook an independent search for comparables and added two new comparables to the list and recomputed the margin of the comparable company selected by the assessee. The comparables being: ....
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....afresh. 17. Without prejudice, the assessee has made a prayer that the correct margin of Hindustan Mills Ltd., should be taken. We are of the view that in the event of this company being considered as a comparable company, the claim of the assessee that the correct margin of this company is 7.27% as against 14.02% taken by the TPO should also be examined afresh, after due opportunity of being heard to the assessee. 18. With regard to exclusion of Laxmi Machine Works Ltd., the comparability of this company though raised as a ground before the DRP has not been considered by the DRP and therefore we deem it appropriate to set aside this issue also to the TPO/AO for consideration afresh. The TPO will also examine the claim of the assessee that the margin of this company is 8.35% as against 10.95% taken by the TPO apart from functional comparability of this company. The AO/TPO is directed to compute the ALP of the international transactions after affording opportunity of being heard to the assessee in accordance with the directions contained in this order. 19. As far as the corporate tax issues are concerned, the same are projected in ground Nos.11 to 14. Section 115JB of the A....
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....41,87,434/-, and provision for long service award of Rs. 5,22,921/- and provision for gratuity Rs. 47,80,000/- by treating the same as ascertained liability, while computing the 'book profits' under section 115JB of the Act. According to the AO, the provision for liability is in the nature of unascertained liability and as per Explanation below Sec.115JB (2) of the Act, those sums have to be added to the profit as per profit and loss account for arrive at book profit u/s.115JB of the Act. 21. Thus the DRP regarded assessee's submissions with regard to "Lakshmi Machine Works Ltd. and "Veejay Lakshmi Engineering Works Ltd. ( as against "Hindoostan Mills Ltd.") as being incorrect and of being factual in nature could be verified by the AO/TPO. 22. Before the Tribunal, the primary submission is that ''Hindoostan Mills Ltd." considered by the TPO/DRP is functionally not a comparable. The said comparable is involved in the sale of clothes whereas the assessee company is engaged in manufacturing of textile machinery. Further it is also submitted that the TPO in the show cause notice dated 12.01.2015 herself mentioned the main product /service group of Hindoostan Mills Ltd. as....
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....11.20 18 ] 16. As per the provisions of section 40(a)(ii) of the Income-tax Act, 1961 ( in short, the 'Act') 'any rate or tax levied' on profits and gains of business or profession' shall not be deducted in computing the income chargeable under the head 'profits and gains, business or profession. 17. The Ld. Counsel for the assessee has submitted that 'Cess' has not been specifically mentioned in the aforesaid provisions of section 40(a)(ii) and, therefore, Cess is an allowable expenditure. He in this respect has relied upon the "CBDT Circular No. 91/58/66-ITJ(19) dated 18-05-1967", wherein it has been interpreted that the 'Cess' shall not be disallowable. The said Circular for the sake of ready reference is reproduced as under:- "Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 - Clarification regarding.- "Recently a case has come to the notice of the Board where the Income Tax Officer has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act. 2. The view of the Income Tax Officer is not correct. Clause 40(a)(ii) of the ....
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....questions came for adjudication before the Hon'ble Apex Court:- "Whether the words "Income tax" in the Finance Act of 1964 in sub-s (2) and sub-s.(2)(b) of s. 2 would include surcharge and additional surcharge." 20. The Hon'ble Supreme Court answered the question in favour of revenue observing as under:- "In our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income tax. The meaning of the word "surcharge" as given in the Webster's New International Dictionary includes among others "to charge (one) too much or in addition " also "additional tax". Thus the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to s. 2 of the Finance Act 1963 it would lead to the result that income tax and super tax were to be charged in four different ways or at four different rates which may be described as (i) the basic charge or rate (In part I of the First Schedule); (ii) Surcharge; (iii) special surcharge and (iv) additional surcharge calculated in the manner provided in the Sche....
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....s accordingly dismissed." 27. Following the aforesaid decision, we dismiss the additional ground raised by the assessee. The aforesaid amounts admittedly were credited in the profit and loss account. According to the AO, the aforesaid sum had to be included as part of the book profits u/s 115JB of the Act as it is not one of the item of income which has to be excluded from the net profit as per profit and loss account, set out in the explanation below Sec.115JB(2) of the Act. The CIT(A) confirmed the action of the AO. 28. As far as Provision for Bonus and Gratuity is concerned, the provision is created on the basis of payment of Bonus Act, 1965 and Gratuity Act, and there is certainty in incurring the said liability. The said provision is being estimated with reasonable certainty thereby making it ascertained and not unascertained. The provision is being determined based on consistent policy followed by the company. The assessee has obtained a certificate from the Chartered Accountant that computation of allocable surplus is as per the provisions of payment of Bonus Act, 1965. The said provision is being estimated with reasonable certainty thereby making it ascertained and no....
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....uto components. The proportionate of raw materials imported from the AE was 16.60% and 14.42% in the textile machinery manufacturing segment and auto components manufacturing segment respectively. In the appeal for Assessment Year 2012-13, the learned Counsel for the assessee has pressed for adjudication of only ground Nos.2 and 3. These grounds read as follows: 2. That the Learned AO/ Learned Panel erred in law in not restricting the transfer pricing ("TP") adjustment to the cost relating to import of raw materials from the associated enterprises i.e., 16.6o% and 14.42% of the total cost, with respect to the auto components manufacturing segment and the textile machinery manufacturing segment, respectively. 3. That the Learned Panel erred in law and on facts in disregarding the application of gross profit ("GP")/ Sales, as the appropriate profit level indicator with respect to the auto components manufacturing segment. 33. As far as ground No.2 is concerned, the prayer of the learned Counsel for the assessee was that the TPO while determining the ALP and making an addition, has taken the entire segmental sales in the textile machinery segment and auto componen....
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....ns of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by only restricting to transactions with AE. The Hon'ble Bombay High Court held that one has to take only the international transactions of the assessee with its AE for the purpose of determining arms length price. 35. The Hon'ble Mumbai Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 7032/Mum/2011] held that the ALP can only be determined on the value of international transaction alone and not on the entire turnover of the assessee at entity level. This decision was further upheld by the Hon'ble Bombay High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 2201 of 2013], which held as below:- "2. .............. (a) Whether on facts and the circumstances of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs.)? 3. ........... ........... (e) We find that in terms of Chapter X of the Act, re determination of the consideration is to be done only with regar....