TaxTMI 
TaxTMI 
2023 (1) TMI 1199
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.... following grounds: 1. The order of the learned AO/ CIT(A) is based on incorrect interpretation of law and therefore, is bad in law, and hence liable to be quashed. 2. Disallowance of vehicle registration and other expenses 2.1. The learned AO/ CIT(A) erred in law and facts, in treating the sum of INR 2,04,289 being expenditure incurred towards RTO charges and vehicle transfer charges as capital expenditure and thereby erred in not allowing the same under section 37(1) of the Act. 2.2. The learned AO/ CIT(A) failed to appreciate that expenditure incurred towards RTO charges and vehicle transfer is incurred wholly and exclusively for the purpose of business and therefore should be allowed as deduction under section 37(1) of the Act. 2.3. The learned AO/ CIT(A) erred in law and facts, in not allowing expenditure amounting to INR 25,000 incurred towards earnest money deposit. 3. The learned AO/ CIT(A) erred, in law and on facts, in not considering the claim of excess disallowance on account of interest on finance lease amounting to INR 4,95,359 (the Appellant had inadvertently added back interest on finance lease amounting to INR 2....
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....s-avis the Appellant as contended by the Appellant. 9. The learned CIT(A) has erred, in law and in facts, by adopting foreign exchange revenue filter for excluding companies having earnings in foreign currency exceeding 40 percent of the turnover vis-a-vis 25 percent of the turnover. 10. The learned CIT(A) has erred, in law and in facts, by upholding the order issued by the AO/ TPO, not granting suitable adjustment as per Rule 10B on account of abnormal foreign exchange fluctuation loss suffered by the Appellant vis-a-vis comparables. 11. The learned CIT(A) has erred, in law and in facts, by upholding the order issued by the AO/ TPO, in relation to treatment of product development expenses as an operating item for the purpose of computation of operating margin of the Appellant. 12. Without prejudice to Ground number 7 above that Bharath Insecticides Limited, along with few other comparables, should not be considered as a comparable, the learned CIT(A) has erred, in law and in facts, by disregarding the submissions made by the Appellant, in relation to erroneous computation of operating margins of Bharat Insecticides Limited by the leaned TPO. ....
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.... amend and / or delete any of the grounds mentioned above." 2. Brief Facts are as under: 2.1 The assessee sells its finished products to third parties in India and also resells the chemicals and formulations imported from FMC Corporation, USA. The assessee also imports raw materials (Lithium Metal) and finished goods for trading from FMC Corporation, USA and FMC Chemicals Ltd, UK. The assessee also provides certain support services to the various divisions of FMC. The assessee also provides development services to the API Hong Kong and application support services to the Health & Nutrition (Pharma) division of FMC Corporation, USA. The support services provided by it are in the form of business development services, SAP Application Support Services, Human Resource Services and Regulatory Affair Management Services to its Associated Enterprises. The assessee filed return of income for A.Y. 2013-14 on 30.11.2013 declaring loss of Rs.14,39,56,613/-. 2.2 The case was selected for scrutiny and notice u/s. 143(2) was issued to assessee on 03/09/2014, which was duly served on the assessee. In response Shri Krishna Murthy, Authorised Representative appeared and submitted the detai....
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....in-trade 453003822 453003822 Change in inventory-WIP -76858065 -76858065 Tolling Charges 224404279 224404279 Employee expenses 126303637 30224383 6414058 162942078 Other expenses 416026239 27834755 5081562 448942556 Provision for doubtful trade receivables 22110432 22110432 Loss on sale of fixed assets 12296 12296 Interest expenses 16456906 16456906 Product development expenses 32845694 32845694 Depreciation 23088513 6359667 29448180 Total Expenses 2202838769 64418805 11495620 38579634 2317332828 Operating Profit - OP -81812170 12174247 1379474 -95641802 OP/Sales -3.86% OP/OC 18.90% 12.00% -4.13% 2.6 Assessee was called upon to explain th....
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....FMC India Private Limited (hereinafter referred to as the `Appellant'), respectfully craves leave to file additional grounds of appeal in addition to the grounds of appeal filed previously by the Appellant on September 18. 2018, which are detailed herein below: On the facts and in the circumstances of the case and in law: 16. Without prejudice to other Grounds of appeal, the learned AO/TPO and the learned CIT(A) have erred in not restricting transfer pricing adjustments to transactions with Associated Enterprises, in the nature of purchase of materials, in proportion such transactions with Associated Enterprises bear to total operating cost of the Appellant. 17. The learned AO/TPO and the learned CIT(A) failed in not appropriately factoring in correct impact of foreign e 'change fluctuation in relation to different transactions while working out operating margin of the Appellant. The Appellant craves leave to add, alter, amend, vary. omit or substitute the aforesaid ground of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law." 6.1 It has....
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....curred by assessee towards earnest money for applying in a Government tender. The Ld.CIT(A) after considering the submissions of assessee disallowed the expenditure of Rs.25,000/- which was in the nature of the refundable deposits by treating as not a revenue expenditure. As regards the balance expenditure of Rs.2,04,289/- on registration of new vehicles and /or for transfer of registration of vehicles from Andhra Pradesh to Karnataka was held to be capital in nature however depreciation was granted. Before us, the Ld.AR submitted that the revenue authorities has erred in disallowing the registration expenses as capital in nature even though all the vehicles were registered in assessee's own name. It was submitted that these vehicles were used by the assessee for the purposes of its business. The Ld.DR on the contrary submitted that the vehicle registration expenses has been rightly capitalised as the expenditure are incurred in respect of the capital asset that forms part of the block of assets of the assessee. He relied on the orders passed by the Ld.CIT(A). We have perused the submissions advanced by both sides in the light of records placed before us. 9.3 The disallowance of....
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....o entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income Tax Appellate Tribunal under section 254 of the Income Tax Act, 1961. " Respectfully following the above, in our opinion, this issue needs to be remanded to the Ld.AO to consider the loss as declared by the assessee in the revised return. Accordingly, Ground No.3 and 14 stands allowed for statistical purposes. 12. Ground No.4 read with Ground No.14: are in respect of product development expenses treated as capital in nature. 12.1 At the outset, it is submitted that identical issue has been considered by this Tribunal in assessee's own case for assessment year 2014-15 reported in (2022) 137 taxmann.com 191. 8. The next issue relates to the disallowance of Product development expenses of Rs. 4,36,88,418/-. The assessee submitted before the AO that it has incurred these expenses with the intention of expanding the existing line of business. The assessee submitted that incurrin....
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.... account or on behalf of its AE. If the assessee has incurred expenses on behalf of the AE and the benefits of these expenses go the AE, then the Ld DRP was justified in disallowing this claim. If it is not so, then the assessee is required to prove that these expenses are not capital in nature. The facts available on record are not clear as to whether these expenses are routine expenses incurred for expansion of existing business or not. If it is so, then the relevant expenses are allowable as revenue expenditure. In the absence of relevant details, we feel it proper to restore this issue to the file of AO for examining it afresh in the light of discussions made supra and also in accordance with law. Accordingly we restore this issue to the file of AO. 12.2 The Ld.AR submitted that the facts un the present year under consideration is identical to assessment year 2014-15. The Ld.DR did not object for the issue to be remanded to the Ld.AO. Based on the above, we remand this issue to the Ld.AO for considering it afresh in light of the above observation by the coordinate bench. Accordingly these grounds raised by the assessee stands allowed for statistical purposes. 13. Groun....
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....s observed and held as under: "The assessee also seeks exclusion of M/s. Bharat Insecticides Ltd. the ld. A.R. submitted that this company is dealing in diversified products, viz., pesticides, plant growth regulators, etc. Further, this company also acts as toll manufacturer i.e. doing job work for other companies. He submitted that TPO has wrongly understood that the assessee herein is also engaged in toll manufacturing, whereas the fact remain the assessee gets his product processed/manufactured by other toll manufacturers. He submitted that this company also does not have segmental results. Accordingly, he submitted that this company cannot be considered as a comparable to the assessee. 4.11 We heard Ld. D.R. on this comparable and perused the record. The annual report of the company pertaining to assessment year 2014- 15 (F Y 2013-14) is placed at page Nos. 2370 to 2408. We notice that the principal product dealt by the company is stated as "pesticides formulation". The total revenue from operations is shown at Rs. 261.88 crores in the profit & loss account and the entire turnover pertains to pesticides formulation only as per information given at page Nos. 23....
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.... divisions of FMC. The taxpayer provides development services to the API Hong Kong and application support services to the Health & Nutrition (Pharma) division of FMC Corporation, USA. Also it provides support services in the form of Business Development Services, SAP Application Support Services, Human Resource Services and Regulatory Affairs Management services to FMC Corporation and its affiliates. 2.2 The taxpayer company has stated in its website that the company is engaged in "all major classes of crop protection chemicals -insecticides, herbicides, fungicides and plant growth regulators."" 13.3.4 The Ld.DR further submitted that the assessee is also selling the manufactured products locally as well as to its AE in USA. He submitted that assessee in its website also shows as it is engaged in all major classes of crop protection chemicals, insecticides, herbicides, fungicides and plant growth regulators which are manufactured products by this comparable. He thus submitted that this is the comparable that should be retained. We have perused the submissions advanced by both sides in the light of records placed before us. 13.3.5 We note that this comparable has onl....
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.... respect of non granting of Working Capital Adjustment in respect of the comparables to iron out differences if any. We have perused the submissions advanced by both sides in the light of records placed before us. "9.1 The submissions of the appellant have duly been considered. Rule 10B the Income Tax Rules, 1962 provides for making reasonably accurate adjustments to the uncontrolled comparable transaction to eliminate the mater effects of such differences on the price, cost or profits. If the assessee is able demonstrate that difference in its working capital vis-a-vis that of comparable companies had affected its profit margin, adjustment is warranted provided that such adjustment could be computed in a reasonably accurate manner. The appellant has not been able to demonstrate that the working capital differences had impacted its profits. No analysis of a. Whether the comparable companies have financed their working capital by own funds or borrowed funds; b. Whether any cost has been incurred on the working capital by the comparable companies and if so, c. How the cost of such working capital has had an impact on the margins of the comparabl....
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....h in respect of selecting the range of this filter. In the interest of justice we remand this issue back to the Ld.AO/TPO to consider this claim in accordance with law. Needless to say that proper opportunity of being heard must be granted to the assessee. Accordingly Ground 9 in assessee's appeal and Grounds 3-4 in revenue's appeal stands allowed for statistical purposes. 18. Ground No.10 is raised by the assessee for not treating Foreign exchange loss as extra ordinary and therefore to be excluded for computing operating margin. Similar issue is also raised by the assessee in Additional ground no.17. 18.1 The Assessee during FY 2012-13, has incurred the foreign exchange fluctuation loss amounting to INR 9,09,50,569. 18.2 Of the above, INR 1,37,45,729 is relating to borrowings of the Assessee, i.e., financing activity pertaining to exchange loss in relation to External Commercial Borrowing ('ECB') loan, not pertaining to operating activities of FMC India. 18.3 The Ld.AR thus contended that the said amount is to be excluded while calculating operating results of the assessee and hence will also not form part of operating margin of the assessee. The Ld.AR a....
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....he international transaction in view of the abnormal foreign exchange loss incurred by the Assessee during the year under consideration. Accordingly, we request your goodself to provide us with the below adjustment - Foreign exchange fluctuation loss incurred by the assessee as a percentage of turnover (A) 3.64% Average foreign exchange fluctuation gain incurred by the comparables companies as a percentage of turnover (comparables selected by the learned TPO) (B) 0.08% Adjustment to get the international transaction at par with comparable transactions (C=A+B) 3.72% Without prejudice to the above, we wish to submit that, in a scenario where foreign exchange fluctuation loss of 1NR 1,37,45,729 relating to ECB loan is also considered as operating expense, total foreign exchange fluctuation loss would constitute 4.29% of turnover of the Assessee and applying above analogy we would request your goodself provide an adjustment to the extent of 4.38%." 18.4 On the contrary, the Ld.DR relied on the observation of the DRP which is scanned and reproduced as under: 10.0 Vide ground of appeal 12 the appellant has argued that Foreign exchange loss should he....
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....f operating revenue/operating cost. The Bangalore bench of the Tribunal in SAP Labs India (P.) Ltd. v. ACIT (2010) 6 ITR (Trib) 81 (Bang) has also held that foreign exchange gain should be added to the operating revenue. The Mumbai Bench of the Tribunal in Rushabh Diamonds, Mumbai v. ACIT in ITA No.7217 vide its order dated 26-04-2013 (to which the AM is party) has also held foreign exchange gain as a part of operating profit". 10.2 Thus foreign exchange loss/gain has rightly been considered as operating in nature by the TPO. Considering above, the ground of appeal 12 of the appellant is dismissed." We have perused the submissions advanced by both sides in the light of records placed before us. 18.5 It is the submission of the Ld.AR that the adjustment in respect of foreign exchange loss is to be considered as nonoperating in the hands of assessee, rather than the uncontrolled comparables. In support he placed reliance on following decisions: • decision of Hon'ble Delhi Tribunal in case of Honda Trading Corporation India Pvt.Ltd., in ITA No.5297/Del/2017 by order dated 08/03/2013 • decision of Hon'ble Mumbai Tribunal in case of Pengea3 and L....
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....djustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties." Para 2.74 states as follows: "..... Thus where the differences in the characteristics of the enterprises being compared have a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis under the transactional net margin method' (Emphasis supplied) US transfer pricing Regulations on this aspect is as follows:- Regulation 1.482-1(d)(2) of the US regulation states as follows: "In order to be considered comparable to ....
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....rovision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin of tested party. This view is laid down in the following decisions:- * Capegemini India Pvt. Ltd. (ITA No.7861/Mum/2011) * Demang Cranes & Components (India) Pvt Ltd. [49 SOT 610 (Pune)] 18.11 Forex loss/gain may arise in the normal course of the business, and can be reckoned as operating in nature, however the loss/gain arising on account of abnormal fluctuation or on account of abnormal movement in forward exchange contracts has to be treated as non-operating in nature. We place reliance on following decisions: Decision of Hon'ble Delhi Tribunal in case of Schneider Electric India (P.) Ltd. v. Dy. CIT reported in (2016) 75 taxmann.com 115 Decision of Hon'ble Delhi Tribunal in case of Honda Trading Corpn. India (P.) Ltd. reported in (2013) 33 taxmann.com 21; Decision of co-ordinate bench of this Tribunal in case of SAP Labs India (P.) Ltd. reported in (2010) 8 taxmann.com 207 Decision of co-ordinate bench of this Tribunal in case of CISCO Systems (India) (P.) Ltd. reported in (2014) 50 taxmann.com 280 18.12 The reliability and....
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....e notice that the decisions relied on by Ld.AR support the plea of the assessee. Respectfully following the decisions referred to herein above, we direct the AO/TPO to restrict the transfer pricing adjustment to the international transactions relating to import of raw materials and finished goods entered with its A.Es. Accordingly Additional Ground no.16 raised by assessee stands allowed for statistical purposes. 20. Ground No.15 is consequential in nature and do not require any adjudication. In the result, appeal filed by assessee stands partly allowed and appeal filed by revenue stands allowed for statistical purposes. Order pronounced in open court on 29th September, 2022. ============= Document 1 FINAL SET OF COMPARABLES S No. Name of Company 1 Anshul Specialty Molecules Pvt. Ltd. 2 Bharat Insecticides Ltd. OP/OR (in %) 8.05% 14.27% 3 Bharat Rasayan Ltd. 4 Biostadt India Ltd. 9.06% 4.70% 5 Excel Crop Care Ltd. 4.61% 6 Gharda Chemicals Ltd. 10.38% 7 Meghmani Industries Ltd. 4.02% 8 PI Industries Ltd. 12.41% 9 Rallis India Ltd. 12.09% 10 Super Crop Safe Ltd. 1.92% 11 Bhagiradha Chemicals &....
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....ction. For computing the net margin from the international transaction, all the incomes and expenses which have relationship with international transaction should be considered. The product development expenses have no linkage to the international transactions but are for the future products. These, products are launched in future and the revenue generated from these products is crystallised in future years. The Appellant therefore submits that product development expenditure should be treated as non-operating in nature and should be excluded from operating cost of the Appellant while computing the arm's length price. The product development expenses are incurred for the products which would be launched in the future. These expenses are not for the existing products. The international transaction with the associated enterprise is towards purchase of raw material for the products which are currently being manufactured. 11.1 The submissions of the appellant have duly been considered. As regards product development expenses the appellant has computed book profits by treating the same as revenue expenditure. For the purpose of computing operati....
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....ite having incurred the requisite expenditure along with the submission of the relevant documents as required by the CIB. We would like to highlight that an expenditure needs to be seen from a larger context of business necessity/ exigency. These expenses are incurred with the intention of expanding the existing line of business of FMC India. Further, such development exparises do not result in enduring benefit to the Company as such. The product development expenditure is not for acquisition of an asset or a right of permanent character. The expenditure aids the assessee to continuously improve on its portfolio of products. In this connection, the Company wishes to highlight that the expenditure in relation to product development has been treated as a deductible revenue expenditure while computing the taxable income for the said AY. The assessee wishes to rely on the following judicial precedents in this regard: 12.1 The appellant also relied upon various decisions to support its contentions that the product development expenses are revenue in nature. 12.2 The submissions of the appellant have duly been considered. The appellant has its....