DCIT 2(2)(1), MUMBAI vs. GEA PROCESSING ENGINEERING INDIA P.LTD, GUJRAT

3. The learned AO in Assessment Year 2005-06 has raised following grounds of appeal: –

“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment to ₹ 2,37,93,786/- without appreciating the fact that the segmental account and the net segmental margins filed by the assessee are not reliable as the same is based in proportionate allocation of indirect expenses with the sales.

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment amounting to ₹ 2,37,93,786/- without appreciating the fact that different international transactions with the AE are closely linked and overlooked various judicial pronouncement.”

“1. The learned CIT (A) has erred in not adjudicating the ground preferred by the Respondent/Cross- Objector, in relation to the arbitrary and irrational upward adjustment of 25% to the receipts and 25% downward adjustment to the payments, as it is incorrect and illegal both on facts and law, for the reason that no specific adjudication on this ground was warranted pursuant to the decision rendered by the learned CIT(A).”

iii. Return was picked up for the scrutiny. iv. As the assessee has entered into international transaction, the reference was made under section 92CA (1) of the act on 7/9/2007 to The Transfer Pricing Officer – II (2), Mumbai (the learned TPO) to determine the arm's-length price of the international transaction where the assessee entered into 12 different international transactions. v. The learned TPO issued various notices to the assessees, which were not complied. Subsequently on 23 October 2008 the assessee submitted form number 3CEB, annual accounts, computation of income, acknowledgement of return and summary of transfer pricing study report without certificate from the auditor. vi. Again, on 24 October 2008, assessee made an application to furnish additional details and documents to substantiate the arm's-length price in relation to the international transaction and further time was sought for. vii. The learned transfer-pricing officer found it not feasible to grant further time to the assessee. viii. He computed the margins of the assessee as per the financials submitted. x. With respect to the international transaction of purchase of components and space of ₹ 7.62 crores, the learned TPO noted that assessee has purchased components and spares from its associated enterprises. The assessee has used cost plus method as the most appropriate method to justify the arm's- length price. The assessee receives EPC orders, which require various types of components and equipment designing in the specific manner by the AE. Assessee also imports such equipments for its project business as well as for equipment sales. The assessee has used cost plus method to benchmark the above transaction but the workings of the cost etc have not been furnished. Further, the prices have not been compared with any uncontrolled transaction. xi. With respect to the payment of design and engineering fees of Rs. 1.13 crores, the learned transfer pricing officer noted that for rendering the technical services and execute various EPC projects in India the assessee has made the above payment to its associated enterprises. The assessee has adopted the cost plus method to justify the arm's- length price. Assessee informed that usually it is paid at the rate of 5% on net tax works order value is xii. With respect to the receipt of commission of ₹ 7,714,756 being commission received from the associated enterprises amounting to ₹ 0.13 crores arm's-length price of which has been determined at ₹ 7,714,756 from the associated enterprises for extending the marketing as well as administrative support in India. The assessee has adopted the profit Split Method for justifying the said transaction. It was further stated that commission is received on the orders directly booked by the associated enterprises in India and commission slabs are based on the amount of the order. It was further stated that sometimes customers prefer to place orders directly on associated enterprises instead of the assessee company. Assessee extends marketing as well as administrative support in such cases and receives commission based on market condition and mutual negotiation. It was the claim of the assessee that it is sharing of profit from the associated enterprises from the business generated in India and therefore it had followed the profit split method as xiii. Based on the above submission, the learned transfer-pricing officer held that assessee has merely submitted raw details without any supporting evidences and therefore the arm's-length price of the international transactions cannot be determined. Accordingly he made an adjustment of 25% in all the above three International Transactions on ad hoc basis and computed the arm's-length adjustment of ₹ 23,793,786/– by passing an order under section 92CA (3) of the act on 31/10/2008. xiv. Accordingly the assessment order under section 143 (3) of the act was passed by the learned AO on 28/11/2008 wherein the only adjustment was the transfer pricing adjustment of ₹ 23,793,786/– determining the total income of the assessee at ₹ 82,569,626/– against the returned income of ₹ 58,775,840/–.

i. 25% adjustment to the arm's-length price of the import of spares and components and payment of design and engineering services international transaction holding that the iii. Even otherwise he held that the methodology adopted by the appellant company was to be rejected the TPO ought to have followed the benchmarking methodology prescribed under section 92C(3) of the act in any way the adjustment proposed of margin at the rate of 25% is liable to be set-aside even on this count. iv. Accordingly the appeal of the assessee was partly allowed. v. The learned assessing officer is aggrieved with the same and is in appeal before us.

i. entity level transactional net margin method applied by the learned transfer pricing officer is not in accordance with the law and therefore has rightly been rejected by the learned CIT – A. ii. Applicability of resale price method is the most appropriate method over transactional net margin method for import of transactions. iii. The segmental transactional net margin method drawn up using allocation of indirect cost in proportion of turnover is accepted.

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the segmental information and holding that the benchmarking at entity level using TNMM by the AO and adjustment of ₹ 60,24,437/- is not correct, without appreciating the fact that all transactions are closely linked.

2. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the Resale Price Method applied by AO and holding that the benchmarking at entity level using TNMM by the AO is not correct without appreciating the fact that all transactions are closely linked.

3. On the fact and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the depreciation on goodwill amounting to ₹ 4,92,20,000/- without appreciating the fact that goodwill is the integral part of business and depreciation on goodwill cannot be ignored while determining PLI.

4.On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the depreciation on goodwill amounting to ₹ 05,19,11,719/- without appreciating the fact that in the schedule of fixed assets, goodwill was shown as intangible asset in the

5. On the fact and in circumstances of the case and in law, the Ld. CIT(A) erred in deleting the deleting provision for warranty and liquidated damages amounting to ₹ 4,43,71,772/- without appreciating the provision of Rule 46A of the I.T. Rules and without giving opportunity of additional evidence by AO.

6. On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance under Sec. 36(1)(va) of the Act without appreciating that the employees contribution to EPF is deemed to be income u/s. 2(24)(x) and deduction is allowable under sec. 36(1)(va) of Act only if the payment is made on or before the due date for payment ignoring the decision of Gujarat High Court in the case of Gujarat State Road Transport Corporation, reported in 366 ITR 170.”

CO No. 127/MUM/2017 Arising Out of (Assessment Year 2009-10) “1. On the facts and circumstances of the case, the learned CIT(A) has erred in holding that the order of the learned AO is not bad in law even thought the learned AO had failed to make a reference to the TPO in accordance with instruction No. 3 of 2003, since

2. Without prejudice to any other ground/ cross- objection, on the facts and circumstances of the case, the learned CIT(A) has erred in not adjudicating the ground preferred by the Respondent, Cross-Objector that in case the learned AO were to apply Transactional Net Margin Method at entity level for the purpose of benchmarking various international transactions entered into by the Respondent/ Cross- Objector during the year, „Depreciation on Goodwill‟ amounting to INR 4,92,20,000/- ought to be excluded while doing so. The learned CIT(A) held that the subject ground/cross-objector became academic in nature pursuant to the decision rendered by him on the earlier grounds.

30. Ground number 4 of the appeal of the AO is with respect to the depreciation on goodwill, it was submitted that this issue is squarely covered by the decision of the coordinate bench in assessee's own case for assessment year 2007 – 08 and assessment year 2008 – 09. The learned CIT – A has decided this issue at paragraph number 9. This issue is squarely covered by the decision of the coordinate bench. For this year the depreciation if it is allowable , is on opening WDV of Good will. Therefore, respectfully following the decision of the coordinate bench for earlier years in the assessee's own case, we direct the learned

31. Ground number 5 of the appeal is with respect to deleting the provision for warranty and liquidated damages amounting to ₹ 44,371,772/–. The learned assessing officer disallowed these expenses contending that the appellant company has failed to establish as to how the provision for the warranty has been calculated by the appellant company and whether the same is based on any scientific method as per the nature of the business, sales, product manufactured and sold and historical trend. The learned CIT – A has noted that assessee has already disallowed the above sum in the computation of total income. Therefore, this amounts to double disallowance. We do not find any infirmity in the direction of the learned CIT – A that when assessee itself has disallowed the same in its computation of total income, disallowance once again made by the learned AO will result into double disallowance. It was not shown to us by the learned departmental representative that the finding of the learned CIT – A are incorrect. Accordingly, ground number 5 of the appeal of the AO is dismissed.

32. Ground number 6 of the appeal of the AO, with respect to the disallowance of employees' contribution to provident fund deposited beyond the due dates of the respective act. The learned CIT – A has deleted the disallowance for the reason that assessee has deposited the dues of the

1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment to ₹ 2,31,25,984/- without appreciating the fact that the segmental account and the net segmental margins filed by the assessee are not reliable as the same is based in proportionate allocation of indirect expenses with the sales.

2. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in deleting the Alp adjustment amounting to ₹ 2,31,25,984/- and holding that the benchmarking at entity level using TNMM by the TPO

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ALP adjustment amounting to ₹ 2,31,25,984/- without appreciating the fact that different international transactions with the AE are closely linked and overlooked various judicial pronouncement.

4. On the facts and circumstances of the case and in law, the Ld. CIT has erred in directing the Assessing Officer to restrict the disallowance u/s. 14A r.w. Rule 8D(2)(iii) by excluding the long term investments which are in the nature of strategic investments relying on the decision of ITAT in case of Garware Wall Ropes Ltd (65 SOT 86), without appreciation the fact that the decision of the ITAT has not been accepted by the department and appeal has been admitted by the Hon‟ble High Court.”

2.. On the facts and circumstances of the case, the learned CIT(A) has failed to adjudicate that even in a case where disallowance is to be made under section 14A of the Income-tax Act, 1861 (the Act) read with Rule 8D of the Income-tax Rules, 1962, the disallowance has to be computed on the average value of investments, as appearing in the balance sheet of the Respondent/ Cross-Objector, on the first day and last day of the previous year, as against the action of the learned AO in considering the entire value of strategic investment for the purpose of computing disallowance thereinunder.

Order pronounced in the open court on 24.02.2023.