TaxTMI 
TaxTMI 
2022 (12) TMI 683
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.... "The learned Assessing officer erred in fact and in law in not considering Nile Ltd. as comparable in applying Transactional Net Margin Method on invalid ground that Nile Ltd. is engaged in different kinds of activity i.e. glass lined equipment division, lead division and wind energy." 3. The Learned Commissioner (Appeal) erred in disallowing Rs. 91,624/- on ad-hoc basis being 10% of the value of purchases from Glass Steel Parts and Services (Unit of Pfaulder Inc.). 4. The Learned Commissioner (Appeal) erred in disallowing Rs. 19,926/- on ad-hoc basis being 10% of the value of services received from Pfaulder Inc. 5. The Learned Commissioner (Appeal) erred in disallowing Rs. 60,873/- on ad-hoc basis being 10% of the value of services received from Mavag AG. 6. The Learned Commissioner (Appeal) erred in directing the A.O. to work out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis. 7. The Learned Commissioner (Appeal) erred in confirming the disallowance of Rs. 3,22,431/- being administrative expenses u/s. 14A of the Act, considering them incurred in relation to exempted dividend income. ....
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....ty i.e. glass lined equipment division, lead division and wind energy. " 3. The Learned Commissioner (Appeal) erred in disallowing Rs. 96,162/- on ad-hoc basis being 10% of the value of purchases from Glass Steel Parts and Services (Unit of Pfaulder Inc.). 4. The Learned Commissioner (Appeal) erred in disallowing Rs. 1,54,680/- on ad-hoc basis being 10% of the value of services received from Pfaulder Werke GMBH. 5. The Learned Commissioner (Appeal) erred in directing the A.O. to work out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis. 6. The appellant prays for appropriate relief on the above grounds of appeals. 7. The appellant craves leave to add, alter, amend, substitute, or withdraw any of the above grounds of appeal as circumstances may justify." Additional Grounds of appeal: "Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT. 1. On the facts and ci....
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....k out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis. 5. The appellant prays for appropriate relief on the above grounds of appeals. 6. The appellant craves leave to add, alter, amend, substitute, or withdraw any of the above grounds of appeal as circumstances may justify." Additional Grounds of appeal: "Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT. 1. On the facts and circumstances of the case and in law, Both lower authorities erred in not allowing deduction of cess paid by the appellant without appreciating fact that cess is revenue expenditure and same is not debarred by section 40(a)(ii) of the Act. Appellant craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal." Department's grounds of appeal: "1. The Ld. CIT(A) has erred in law and on facts in partly deleting up....
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....e calculation of such gross profit margin was not available and therefore, the application of CPM can only be on estimated basis and no accurate calculation was possible. The AO, accordingly adopted TNMM method as the most appropriate method. Thereafter, he adopted return on total cost as profit level indicator (PLI) and also took Swiss Glass Coat Equipment Ltd. as the comparable and adopted profit margin of 13.27% on the operating cost of the company on entity level and made an adjustment of Rs. 1,83,53,946/- under section 92CA of the Act. 5. Before Ld. CIT(Appeals), the assessee submitted that the AO has not followed the due procedure while determining the ALP of the assessee's transactions. The assessee objected to the determination of ALP under TNMM in respect of international transactions. He further objected to Nile Ltd. being excluded from the list of comparables while computing ALP. Ld. CIT(Appeals) observed that the related party transactions for purchases are minor (less than 2%) as compared to the total direct and indirect cost. The Ld. CIT(Appeals) further observed that the AO has applied the TNMM on the total operating cost incurred by the assessee by taking PLI....
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....nal transactions cannot be accurately computed in absence of Nile Ltd. as a comparable company for the reason that firstly, in the assessee's line of business there are primarily three important players: the market share of the assessee in this line of business is 54%, 27% of the business was with Swiss Glass Coats Equipment Ltd. and the remaining 19% of the business was with Nile Ltd. Accordingly, in respect of international transaction in assessee's line of business, ALP cannot be computed if Nile Ltd. is to be excluded from the list of comparables. The AO excluded Nile Ltd. on the ground that firstly, the assessee did not give the details of any search process carried out by him for selection of comparables and in the TP report the assessee gave names of only two comparables Swiss Glass Coats Equipments Ltd. and Nile Ltd. for the purpose of computation of ALP in respect of international transactions, secondly, Nile Ltd. is functionally different from the assessee's business since from the annual accounts of the company, it is seen that it is engaged in different kind of activities which have been classified into three divisions: glass lined equipment division, lead d....
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....ment orders placed on record before us for assessment years 2007-08, 2008-09 and 2009-10. However, we equally note that the issue whether Nile Ltd. should be taken as a comparable while computing TNMM was also never disputed/challenged by the Tax Department in any of the earlier assessment years on the ground that Nile Ltd. had various divisions and there was disparity in asset use i.e. this glass line division of Nile Ltd. was more capital intensive, and hence it is not functionally comparable to the assessee's case. Though the Department has impliedly accepted Nile Ltd. as a comparable while computing TNMM, but since the issue of segmental accounts was not raised/examined at any earlier point in time by the Department, it is not possible to ascertain whether the facts in respect of Nile Ltd. as a comparable in the earlier years are same as compared to facts prevailing in the present year. The Department has raised the issue of comparability of Nile Ltd. as a comparable with the assessee for the first time during the year under consideration and in any of the earlier years, this issue was not considered or analysed by the Department. Further, though the assessee made factual a....
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.... the assessee and computed the ALP as per TNMM. In appeal before Ld. CIT(Appeals), the assessee submitted that since it had received the actual interest at more than the Swiss Libor rate, the ALP should not be more than the actual interest income and the computation of ALP under TNMM is not justified. The main contentions of the assessee were that: (i) the assessee has not given interest free loan (ii) the assessee has charged interest based on the market rate of Swiss Libor at the beginning of the quarter with additional spread margin of 1.25% per annum. The assessee has selected CUP method as the most appropriate method. The interest income of Rs. 31,35,469/- has been credited under the head income in the profit loss account (iii) the AO has computed ALP under TNMM without assigning any reason The assessee submitted that where assessee is not in the business of granting loans, the arm's-length interest rate is not the interest rate charged by the domestic bank as a comparable rate. The appropriate arm's-length interest in such case would be Libor based on CHF Libor based interest rates. Since the assessee has charged interest more than the Sw....
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.... funds of the assessee were mixed and the assessee had incurred certain expenditure for earning exempt income. AO accordingly made disallowance of Rs. 4,18,757/-. Before Ld. CIT(Appeals), the assessee submitted that he has substantial interest free funds, which far exceeded the investment made in shares and mutual funds. The assessee submitted that the investments in shares and mutual funds have been made from the bank account at Citibank at Mumbai and no borrowed funds have been transferred to that account. The new investments have been made from the redemption of investment in dividend income only. Regarding the administrative expenses, the assessee submitted that it has not incurred much expenditure and has itself disallowed an amount of Rs. 96,326/- as per the audit report under section 44AB of the Income Tax Act. On perusal of the submissions and the records of the assessee, Ld. CIT(Appeals) accepted the assessee's contention that the assessee has sufficient interest free funds for making investments in shares and mutual funds. He further accepted that the assessee has been able to demonstrate that the funds for making the investments were separate and there is no mixing o....
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....sessee before the lower authorities, the observation made by ld. CIT(A), decision of the Coordinate Bench in the case of assessee's own case in ITA No. 318/Ahd/2011 (supra) and looking to the facts of the case that interest expenditure is only towards to the working capital limit specifically used for the purpose of business and assessee company having sufficient interest free funds, proves that only interest free funds have been used to invest in shares and mutual funds. Further we observe that is in conformity with the order of the Tribunal, deleting the entire disallowance u/s. 14A of the Act on the ground that assessee had sufficient interest free funds out of which investment was made is in conformity with the judgment of Hon. Jurisdictional High Court in the case of Principal, CIT vs. India Gelatine and Chemicals Ltd. (supra). Respectfully following the judgment of Hon. Gujarat High Court in the case of Principal CIT vs. India Gelatine & Chemicals Ltd. (supra) and the observation made above, we find that no disallowance is called for in the second limb of rule 8D relating to interest expenditure. Now coming to the third limb towards administrative cost to be calc....
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.... Rs. 2,80,347/- (Rs. 30,347/- + 2,50,000/-) is held to be disallowance u/s. 14A of the Act. Accordingly the ground of Revenue is partly allowed. 18.1. Respectfully following the decision in the assessee's own case for the immediately preceding assessment year 2009-10, as against disallowance of 0.5% of the average investment, which works out to Rs. 3,22,431/-, in our view, the disallowance may be restricted to a lump-sum disallowance of Rs. 250,000/- towards administrative cost incurred on maintaining investments in tax free funds. 19. In the result, the appeal of the assessee is partly allowed. Now we shall discuss the Departments appeal : Ground number 1: deletion of upward adjustment of Rs. 1,83,53,946/- made on international transactions : 20. Since in the assessee's appeal, we have restored the matter back to the file of Ld. CIT(Appeals) on whether Nile Ltd. should be included as comparable while computing the ALP in the assessee's set of facts, Ground of Appeal No. 1 of Department's appeal would have to be adjudicated based on the outcome of the decision of Ld. CIT(Appeals) and accordingly, the same is not being adjudicated at this stage. Gro....
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.... 2019. The relevant act extracts of the order are been reproduced here in under for ready reference: "8. In ground no. 2, the Assessing Officer has raised the following grievance: The learned CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 1,90,05,000 made on account of interest expenses under section 36(1)(iii) of the Act without appreciating the fact that once the funds are put into business they lose their identity. 9. So far as this grievance of the Assessing Officer is concerned, the material facts are like this. During the course of assessment proceedings, it was noticed that the assessee has made investments of Rs. 15,83,75,000 in various subsidiaries. It was contended that the assessee has sufficient interest free advances to make these investments. The Assessing Officer however brushed aside the plea and proceeded to compute interest @12%, on notional basis, on such interest free advances and allow the interest deduction under section 36(1)(iii) to that extent. Aggrieved, assessee carried the matter in appeal before the CIT(A) and the learned CIT(A), following the view taken by him for the assessment year 2009-10, deleted the said....
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....is noted that the issue is covered in favour of the appellant by the orders of my predecessor in earlier year. It is also noted that the appellant is paying the Royalty on an annual basis and the same is linked to the sales made during the year. The appellant -has also deducted tax on the royalty payment. It is a recurring expenditure for the year. The appellant has not created any capital asset nor at it acquired any permanent right. In view of these facts and respectfully following the orders of my predecessor CIT(A) in earlier years, the disallowance made by the AO is directed to be deleted. The ground of appeal is accordingly allowed. 25. Before us, Ld. D.R. placed reliance on the observations made by the AO in the assessment order. In response, the counsel for the assessee submitted that the case is directly covered by the decision in the assessee's own case for assessment year 2010-11 by ITAT vide order dated 4th March, 2019 in ITA number 951 and 1370/Ahd/2015. 26. We have heard the rival contentions and perused the material on record. We observe that this issue is directly dealt with by the ITAT in the aforementioned case and the issue is decided in favour....
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....und numbers 2, 3, 4 and 5 of the assessee's appeal are similar to that of assessment year 2010-11 and the observations and conclusions for AY 2010-11 would apply to assessment year 2011-12 as well. 29. In the result, ground numbers 2, 3 and 4 of the assessee's appeal are allowed for statistical purposes. Ground number 5 of the assessee's appeal for assessment year 2011-12 is partly allowed. 30. The counsel for the assessee submitted that the additional Grounds in respect of allowability of deduction of cess paid by the assessee and in respect of adjustments in respect of international transaction with AE's in absence of segmental accounts are not pressed. Accordingly, the addition grounds raised by the assessee for assessment year 2011-12 are dismissed as withdrawn. Department appeal for Assessment Year 2011-12: Ground number 1: deletion of upward adjustment made on international transactions: 31. Since in the assessee's appeal, we have restored the matter back to the file of Ld. CIT(Appeals) on whether Nile Ltd. should be included as comparable while computing the ALP in the assessee set of facts, Ground of Appeal No. 1 of Department's appeal....
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....nce with the policies adopted by it in the preceding years. It has further been pointed out by the appellant that the disallowance made in A. Y. 200-10 has been deleted by the CIT(A) in that year. On a careful consideration of the entire facts of the case it is noted that the appellant has adopted scientific basis for making the provision for warranty. It is further noted that in A. Y. 2009 - 10 and earlier years the CIT(A) has deleted, the disallowance on account of provision of warranty for that year. Since the facts are similar in this year also the disallowance made by the AO is directed to be deleted. The ground of appeal is accordingly allowed." 35. We observe that this issue is directly covered in favour of the assessee in assessee's own case for assessment year 2005-06 by Ahmedabad ITAT order in ITA number 2014/Ahd/2016, wherein the ITAT allowed the assessee's appeal on this issue with the following observations: 6. We are of the considered view CIT(A) has correctly appreciated the fact in perspective in light the position of law properly as rendered by the Honourable Supreme Court in Rotork Controls India Private Limited (supra) and th....
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....ingly, ground number 2 of the Department's appeal is dismissed. Ground number 3: deleting disallowance of education expense amounting to Rs. 35,97,769/- 43. The brief facts in relation to this ground of appeal are that during the impugned assessment year, the assessee debited a sum of Rs. 35,97,769/- in respect of management course of its director Mr. Tarak A. Patel (including travelling expenditure of Rs. 8,74,159/-). The said expense was incurred for enhancing the knowledge and outlook of the director of the company by way of pursuing an extremely specialised educational course abroad. In the assessment proceedings, the AO disallowed the above expenses under section 37(1) of the Act. In appeal, Ld. CIT(Appeals) allowed the assessee's appeal with the following observations: "7.3 I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed education expenditure on the ground that there is no nexus between business expenditure and profitability and income of the assessee. "7.3.1 The appellant on the other hand has submitted that Mr. Tarak Patel has been appointed as Executiv....