THE ACIT, CIRCLE-5, AHMEDABAD vs. M/S. NABROS PHARMA LTD., AHMEDABAD

PER BENCH:

The captioned Cross appeals have been filed at the instance of the Revenue and Assessee against the order of the Commissioner of Income Tax (Appeals)- 1, Baroda [Ld.CIT(A) in short] vide appeal no.CAB/I-387/06- 07dated 11/09/2007 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 29/12/2016 relevant to Assessment Years (AY) 2004-05. The Revenue has also filed appeals for AYs 2005-06, 2007-08, 2008-09 & 2009-10. The Assessee has also filed appeals for AYs 2005-06, 2006-07, 2007-08 & 2008- 09 Since the appeals are inter-connected, these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience.

First, we take Revenue appeal in ITA bearing No.4565/Ahd/2007 for A.Y. 2004-2005. The Revenue has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the disallowance u/s 40A(9) of Rs.20,38,747/-, being contribution to Presanna Trust made by the assessee as an employer, with the observation that this contribution was not shown to have been made for setting up or formation of the aforesaid trust, without appreciating that section 40A(9) equally prohibits deduction in respect of contribution to any fund or trust etc. for any purpose other than that provided in section 36(1)(iv) and (v) and the impugned contribution was not covered by section 36(1 )(iv) and (v). 2.(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding the payment of Rs. 5,54,00,000/- to the associate concerns covered by section 40A(2)(b), in the name of fee for use of technical knowhow, for the manufacture of the assessee's products, as revenue expenditure, without determining the matter on merits and by solely relying on his order for the assessment year 2003-04, which has been contested by the Department as erroneous.

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(b) On merits, the Id. CIT(A) failed to appreciate the binding ratio of the apex court's decision in the case of Scientific Engineering House Pvt. Limited. Vs CIT 157 ITR 86 (SC) and further failed to take note of the fact that, in allowing the expenditure in earlier years, undue reliance was placed on the formal recitals in the agreements with the associate concerns presenting the lump sum payment for acquisition of technical knowhow as periodical payment of fee for the use of the said knowhow and such presentation at the cost of substance is immaterial for determining the basic character of payment as capital or revenue as settled in Assam Bengal Cement Co. Ltd. vs CIT27ITR 34 (SC).

On the facts and in the circumstances of the case and in law, the Id. C1T(A) erred in allowing the entire depreciation of Rs.34,22,521/- on data-processing machines in the computation of income of the DTA unit, without appreciating that the assessee was using these machines along with ASP R3 software for controlling the functions of its entire organization comprising DTA unit and tax-free EOU unit and hence depreciation on all the assets used for office work and establishment work including these data processing machines had to be apportioned between the DTA unit and the EOU unit, as was done by the Assessing Officer.

6 On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in allowing the entire advertisement expenses of Rs.2,06,78,311/- in the computation of DTA unit, without appreciating that the advertisement expenses helped to cerate brand affinity in the global market and promoted the sale of all categories of the assessee's products directly or through foreign group companies, thus requiring apportionment of these expenses in a reasonable manner between the DTA unit and the tax-free EOU unit, as was done by the Assessing Officer.

7.(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in negating the exclusion of 90% of the income from write back of credit balances of Rs.25,51,856/- and gain from foreign exchange fluctuation of Rs.1,16,29,805/- under clause (baa) of the Explanation below section 80HHC, without appreciating the import of residuary clause of "any other receipt of a similar nature", which excludes all those receipts which do not form part of turnover akin to export turnover in order to avoid distortion in the working of profits derived from the export in the ratio of export turnover to total turnover, apportioning only the profit from the total of domestic and export turnover.

(b) The CIT(A) failed to appreciate the connotation of 'derived from' in the substantive provision of section 80HHC(1) encompassing only direct receipts from turnover as settled in the case of CIT vs Sterling Foods 237 ITR 579 (SC) and that clause (baa) of the

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Explanation read with section 80HHC(3) only provides a machinery to realise the intent of this restrictive expression in the substantive provision, as settled in the following decisions: i. CIT usK.K.Doshi& Co. 245 ITR 849 (Bom) based on CIT vs Sterling Foods 237 ITR 579 (SC). ii. CIT vsKantilalChottalal 246 ITR 439 (Bom). £ \ Hi. CIT vsPravin M mehta 246 ITR 445 iii. Alembic Chemical Works Ltd. vs DCIT 266 ITR 46 (Guj) holding insurance claim and other miscellaneous income as excludible under Explanation (baa). (c) The CIT(A) failed to appreciate that the only similarity in different receipts specifically mentioned in Explanation (baa) is that they do not form part of turnover and hence the residuary clause must include all the receipts not flowing from turnover in accordance with the rule of enjusdem generis.

(d) The CIT(A) failed to appreciate that the scheme of section 80HHC does not envisage any receipt which is neither included in the total turnover in the denominator of the apportionment formula nor excluded from the profits to the extent of 90% under Explanation (baa), and by not including the impugned receipts in the denominator, the assessee itself had treated them as "any other receipt of a similar nature". 8.(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in including the profits and the export turnover of EOU unit eligible for tax holiday u/s 10B of the Act in the computation of deduction u/s 80HHC without appreciating the heading of Chapter III under which section 10B falls, i.e. "Incomes which do not form part of total income", and the mandate of section 80HHC(4B) and 80AB. (b) Without prejudice, the CIT(A) failed to appreciate that, the expression used in section 80HHC (4B), i.e. "income not charged to tax under this Act" is much wider than the expression "incomes which do not form part of total income" and hence it also covers the income deductible under section 10B as amended w.e.f. 01-04-2001.

(c) The Id. CIT(A) erred in overlooking the ratio of CIT vs Shirke Construction Equipment Pvt. Ltd. 291ITR 380 (SC), IPCA Laboratories Ltd. vs DCIT266ITR 521 (SC) and A.M. Moosavs CIT294ITR1 (SC), holding that section 80AB overrides the provisions of section 80HHC as well and hence the incomes which are deductible under any other provision have to be excluded from the profits of the business while computing deduction u/s 80HHC. (d) The Id. CIT(A) ignored the fundamental rule of interpretation laid down in Escorts India Ltd. vs Union of India 199 ITR 43 (SC) that no Legislature could have intended a double deduction in regard to the same income unless it is expressly provided in the statute and section 80HHC(4B) specifically prohibits such deduction. 9. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.

Relief claimed in appeal The order of the CIT(A) to the above extent may be set aside and that of the A.O be restored.

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The first issue raised by the Revenue in ground No. 1 is that the Ld.CIT (A) erred in deleting the addition made by AO u/s 40A(9) for Rs. 20,38,747/- on account of payment to Prasanna trust for the training of the employees.

2.1 However, AO rejected the contention of the assessee by observing that the above-stated payment has been made for setting up and formation of the trust other than the fund as covered under section 36(1)(iv) and section 36(1)(v) of the Act. Accordingly, the above payment is prohibited under the provision of section 40A(9) of the Act. Therefore the AO disallowed the training expenses amounting to Rs. 20,38,747/- and added back to the total income of the assessee.

The aggrieved assessee preferred an appeal before the Ld.CIT (A).

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2) CIT VS Bharat Petroleum Corporation LTD reported in 252 ITR 43.

3.1 The Ld.CIT (A) after considering the submission of the assessee deleted the addition as made by AO by observing that AO has not doubted the genuineness of the transaction, i.e., payment made to Persanna Trust and carrier training program as conducted for the development of the employees. The AO has not brought anything on record evidencing that the payment was made for the setting up or formation of the trust. Therefore the expense as claimed by the assessee is allowable as Business expenditure u/s 37(1) of the Act.

Being aggrieved by the order of the Ld.CIT (A) the Revenue is in appeal before us.

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6.1 From the preceding discussion we note that there is no evidence brought on record by the AO that the assessee has made payment for setting up or formation of trust. Admittedly the assessee made the payment to the trust, but the payment to the trust does not mean that it is not a business expense. As such if the expenses are incurred in connection with the business, then it is eligible for deduction u/s 37(1) of the Act provided the same is not in the nature of capital and personal expenses.

6.2 In the case on hand the AO has not brought on record whether the expenditures are capital or personal nature. The AO has not doubted the genuineness of the transaction.

6.3 The AO did not call any information regarding the transaction from the trust by using his power given under section 133(6) of the Act.

6.4 In view of the above, this expenditure should be allowable as business expenditure u/s 37(1) of the Act. Accordingly, we dismiss the ground of appeal raised by the Revenue.

The second issue raised by the Revenue in the ground no. 2(a) and 2(b) is that the Ld.CIT (A) erred in holding the payment of Rs. 5,54,00,000/- as revenue expenditure made to associates enterprises for the use of technological know-how.

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assessee claimed that such fee represents the royalty payment determined as a percentage of net sales under the terms of the collaboration agreement.

7.1 However, the AO rejected the contention of the assessee by observing that the impugned issue has been discussed in detail in the assessment order for the previous year relevant to AY 2002-2003 in which it was held that the above said expenditure incurred in respect of technical know-how fees was capital in nature. Accordingly, the AO after relying on the order of his predecessor treated the fees for technical know-how as capital expenditure. Accordingly, the depreciation of Rs. 1,38,50,000/- on above-stated expenditure was allowed and the balance amount of Rs. 4,15,50,000/- was added to the total income of the assessee.

Aggrieved, assessee preferred an appeal before the Ld.CIT (A).

8.1 The Ld.CIT (A) after considering the submission of the assessee and the order of his predecessor for the AY 2003-2004 treated impugned expenditure as revenue in nature. Accordingly the Ld.CIT (A) deleted the addition made by the AO and directed the AO to withdraw the depreciation of Rs.1,38,50,000/- and treat the expenses for Rs. 5,54,00,000/- as revenue expenses.

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Being aggrieved by the order of Ld.CIT (A), the Revenue is in appeal before us.

“6. We have heard the parties at some length. We have carefully perused the orders of the authorities below in the light of a voluminous compilation filed before us containing almost 400 pages and the case laws cited. Before us, an agreement dated 30/03/2000 was referred which was executed between FAG AUTOMOBILTECHNIK AG on one part referred as "the Collaborator" and "FAG Bearings (India) Ltd." as other part mentioned as "the Indian Company". The said Collaborator is a subsidiary of FAG Kugelfischer George Schaefer AG incorporated under the laws of the Federal Republic of Germany. Clause -(c) on page No.1 of the said agreement states that the "Indian Company" and the "Collaborator" have over the years entered into diverse agreements for supply of know- how and technical assistance in respect of diverse types of bearings. The present agreement was in respect of know-how and technical services in respect of the following products. Clutch Release Bearings Altemator Bearings Wheet Bearings Hub units (All generations) Tensioner Icer Assemblies From the side of the assessee by referring the types of the products, i.e., bearings, etc. the main argument was that there were new product

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introduced but mainly the technical assistance was to improve the quality of the existing products.

6.1. Apart from the above specifications, it has also been brought to our notice that the know-how as such was not the property of the assessee. The know-how remained the property of the said "Collaborator" because the "Indian Company" was not permitted to make use of know-how other than the purpose for which it had intended in terms of the said agreement. One of the clause, i.e. clause-9 prescribes that the know-how should not be communicated to any person other than the responsible employees of the "Indian Company". Rather one of the clause prescribes that upon termination of the agreement the Indian Company had to return the Collaborators the said know-how. By referring these clauses and other connected clauses, the argument is that the said know-how in question had never been purchased by the Indian Company, i.e. the assessee. The said know-how had never become an asset of the assessee. The said know-how was to be used by the assessee for limited and specific purposes as prescribed in the agreement.

6.2. In respect of the observations made hereinabove, we have been asked to peruse a clarification issued by Central Board of Direct Taxes by Circular No.21 (F-No.7A/40/68- IT (A-II) dated 9th July, 1969. If a know-how is acquired under an agreement is merely a licence for the user, if it is for a limited period, if the know-how is without the right to use the patents and trade marks then if any payment made would not bring into existence an asset of enduring advantage to the Indian participants. This Circular therefore states that the payment should be regarded if expenditure incurred for the purpose of running the business during the period of agreement. An another argument has also been extended that there were series of agreements, however, the know-how initially was acquired out of an agreement dated 30/08/1996. The changes in the provisions of section 32 were made subsequently from 1st day of April, 1998, therefore not applicable in the case of the assessee. It has been clarified that the agreements executed later on, had in fact, arose out of the original agreements which were in operation since inception of the company. In the light of the factual background, we have scrutinized the case laws cited before us. We have noted that in one of the case it was held that if the payment is made for exclusive acquisition of technical know-how, then the expenditure is capital in nature, but if the payment is for securing the use of know-how, then allowable as revenue expenditure.

6.3. In these decisions, it has been conveyed that the expenditure towards improvisation for the existing business is to be considered a revenue expenditure. In the present appeal, undisputedly the know-how related to the existing manufacturing operation of ball- bearings, i.e.stated to be same type of product. It cannot be ruled out that in a fast growing era of new technologies the outdated or obsolete technologies are required to be replaced and that expenditure can be held a business requirement.

6.4. It has also been noted while reading the clauses of the agreement that one of the clause is about the non-portability. Therefore, this clause has demonstrated that the know- how was not the property of the assessee. Rather, the said Collaborator has imposed a condition of confidentiality and secrecy which leads to an inference that the property belonged to the said Collaborator. Rather, we are inclined to draw an inference that the transfer of know-how in the present set of facts and circumstances was restricted for the use rather than its acquisition. In the light of the reasons assigned hereinabove and considering the totality of the evidence placed on record duly supported by the precedents cited, we hereby hold that the payment of Rs.43.10 lacs was in the nature of revenue expenditure.”

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11.1 As the facts in the case on hand are identical to the facts of the case as discussed above, therefore we are bound to follow the same in view of the judgment of Hon’ble Madras High Court in the case of CIT v. L.G. Ramamurthi 1977 CTR (Mad.) 416 : [1977] 110 ITR 453 (Mad.) wherein it was held as under: "No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal on the same facts. It may be that the members who constituted the Tribunal and decided on the earlier occasion were different from the members who decided the case on the present occasion. But what is relevant is not the personality of the officers presiding over the Tribunal or participating in the hearing but the Tribunal as an institution. If it is to be conceded that simply because of the change in the personnel of the officers who manned the Tribunal, it is open to the new officers to come to a conclusion totally contradictory to the conclusion which had been reached by the earlier officers manning the same Tribunal on the same set of facts, it will not only shake the confidence of the public in judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fancies of the individuals presiding over the Courts or the Tribunals and not reached objectively on the basis of the facts placed before the authorities. If a Bench of a Tribunal on the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why in a High Court, if a single Judge takes a view different from the one taken by another Judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly if a Division Bench differs from the view taken by another Division Bench it does not express disagreement and pronounce its different views, but has the matter posted before a Fuller Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiori with regard to a question of fact. If the Tribunal wants to take an opinion different from the one taken by an earlier Bench, it should place the matter before the President of the Tribunal, so that he could have the case referred to a Full Bench of the Tribunal consisting of three or more members for which there is provision in the IT Act itself."

11.2 We also find that the Hon’ble supreme court case of AmbikaParsad Mishra Vs. State of U.P.and Others vide writ pettion no 1543 of 1977 vide order dated 09-05-1980 has taken the similar view as taken by the Hon’ble High court (supra) as under: “Thus we get the statutory perspective of agrarian reform and so, the constitutionality of the Act has to be tested on the touchstone of Art 31A which is the relevant protective armour for land reform laws. Even here, we must state that while we do refer to the range of constitutional immunity Art. 31Aconfers on agrarian reform measures we do not rest our decision on that provision.

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Independently ofArt. 31A, the impugned legislation can withstand constitutional invasion and so the further challenge to Art. 31A itself is of no consequence. The comprehensive vocabulary of that purposeful provision obviously catches within its protective net the present Act and, broadly speaking, the antiseptic effect of that Article is sufficient to immunise the Act against invalidation to the extent stated therein. The extreme argument that Art. 31A itself is void as violative of the basic structure of the Constitution has been negatived by my learned brother, Bhagwati, J. in a kindred group of cases of Andhra Pradesh. The amulet of Art. 31A is, therefore, potent, so far as it goes, but beyond its ambit it is still possible, as counsel have endeavoured, to spin out some sound argument to nullify one section or the other. Surely, the legislature cannot run amok in the blind belief that Art. 31A is omnipotent. We will examine the alleged infirmities in due course. It is significant that even apart from the many decisions upholding Art. 31A, Golak Nath's case decided by a Bench of 11 Judges, while holding that the Constitution (First Amendment) Act exceeded the constituent power still categorically declared that the said amendment and a few other like amendments would be held good based on the doctrine of prospective over-ruling. The result, for our purpose, is that even Golak Nath's case has held Art. 31A valid. The note struck by later cases reversing Golaknath does not militate against the vires of Art. 31A. Suffice it to say that in the Kesavananda Bharati's case. Article 31A was challenged as beyond the amendatory power of Parliament and, therefore, invalid. But, after listening to the marathon erudition from eminent counsel, a 13 Judges Bench of this Court upheld the vires of Article 31A in unequivocal terms. That decision binds, on the simple score of stare decisis and the constitutional ground of Art. 141. Every now discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent. In this view, other submissions sparkling with creative ingenuity and presented with high-pressure advocacy, cannot persuade us to re-open, what was laid down for the guidance of the nation as a solemn pre-posion by the epic Fundamental Rights case. From Kameshwar Singh and Golak Nath (supra) through Kesavananda (supra) and Kanan Devan to Gwalior Rayons and after Art. 31A has stood judicial scrutiny although, as stated earlier, we do not base the conclusion on Art. 31A. Even so, it is fundamental that the nation's Constitution is not kept in constant uncertainty by judicial review every season because it paralyses, by perennial suspense, all legislative and administrative action on vital issues deterred by the brooding threat of forensic blowup. This, if permitted, may well be a kind of judicial destabilisation of State action too dangerous to be indulged in save where national. crisis of great moment to the life, liberty and safety of this country and its millions are at stake, or the basic direction of the nation itself is in peril of a shakeup. It is surely wrong to prove Justice Roberts of the United States Supreme Court right when he said.”

11.3 In view of the above, we do not find any reason to interfere in the finding of the Ld. CIT-A. Accordingly, we direct the AO to delete the

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addition made by him. Hence the ground of appeal of the Revenue is dismissed.

The third issue raised by the Revenue in Ground No. 3 is that the Ld. CIT (A) erred in reducing the addition made by AO/TPO for Rs. 9.18 crores to Rs.1.79 crores on account of royalty payment of Rs. 1,46,67,000/- and margin of DTA unit of Rs. 7,71,00,000/-.

1) It has two segments namely manufacturing segment and distribution segment. The manufacturing segment has been further divided into two segments namely DTA segments and EOU segment.

2) The assessee provided segments wise details of the transaction with AE in respect of its manufacturing ( DTA & EOU) and distribution segments as detailed under:

Sr.No. Particular DTA EOU Trading Total Amount international (Rs.) transaction 1. Purchase of Bearings 223161520 223161520 Export bearings/tools 2 30580729 357962129 388542858 3 Purchase 921222527 43817022 135939549 RM/component Purchase of tangible 4 12944008 12944008 assets 5 Charges for SAP-R/3 22251469 22251469 6 Reimbursement of 163418 163418 travelling expenses

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7 Testing charges 2021581 2021581 8 Training charges 41202 41202 9 Fees for use of 57206850 11241715 68448565 technology 10 Lumpsum knowhow 2203413 2203413 fees 11 Receipt of consultancy 20483345 20483345 fees Total 219535197 413020866 243644865 876200928

12.1 The assessee also furnished vide letter dated 30-10-2006 segments wise operating margin of its Business in respect of its manufacturing ( DTA & EOU) and distribution segments as detailed under:

DTA EOU Total Trading Total manufacturing Manufacturing Trading OP/Net sales 6.97 35.83 11.32 9.29 11.05 (%) OP=PBIT

3) However, the assessee further revised its and comparables PLI vide letter dated 9-11-2006. According to this letter, the assessee determined its PLI at 13% and the comparable PLI at 9.05% by using the TNMM method. The necessary details relevant to the determination of ALP stand as under: • Assessee selected itself as a tested party, • Used TNMM for ALP • Worked out its PLI @13%(at entity level ) as PBIT on net sales. • Worked out PLI of comparable @9.05%. • 4) In view of the above calculation the assessee submitted before the TPO that its PLI is greater than the mean of the PLI of the comparable

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companies. Hence the transactions pertaining to its AE were carried out at ALP.

Note: The working of the PLI of the comparable is placed on page 98 of the PB.

12.2 However, the TPO being dissatisfied recalculated the PLI by removing Deccan Bearing and HMT Bearing as they were showing loss consistently. Further, the TPO added another comparable namely M/s Menon Bearing and worked out the PLI after exclusion and inclusion of the comparables as detailed below:- • PLI of the tested party is 10.03%. • PLI of Comparable is 10.66%.

12.3 Now the TPO compared the PLI/margin of the assessee for its DTA segment with the PLI/margin of the comparables by observing that margin of DTA segment as calculated by the assessee is 6.97% only which is less than with industry margin 10.66% as computed above.

Note: The TPO agreed for the ALP in respect of EOU (except royalty) & distribution segment as declared by the assessee.

12.4 Accordingly, the TPO in respect of assessee’s international transaction of the DTA segment after aggregating to all of them including royalty made the downward adjustment by observing as under:

“Net sales of DTA Unit is Rs.209.25 Crrores. ALP profit at 10.66% margin is Rs.22.31 Crores. Profit earned is Rs.14.59 Crore as per assessee’s letter dtd 30/11/2006). Therefore, the assessee will undergo an adjustment of Rs.7.71 Crore on the purchase side of DTA Unit Since this adjustment takes caref of need for downward adjustment in royalty payment by DTA Unit, no separate adjustment to royalty payment is being made.”

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12.5 Therefore in light of the above discussion, the TPO made an addition of 7,71,00,000/- (209.25*3.69%) in respect of assessee’s DTA Unit.

12.6 The TPO further has taken the ALP of the royalty payment to assessee’s AE in respect of its EOU unit as NIL after relying on the order of his predecessor for the AY 2003-04. Accordingly, the TPO made the downward adjustment for the entire royalty payment of Rs. 1,12,41,715/-in EOU business segment.

12.7 In view of the above the AO provided an opportunity to assessee regarding the addition of Rs. 8.83 crores (7.71+1.12 crores) as proposed by the TPO in his order. In this connection, the assessee vide letter dated 28/12/2006 replied as under:- Regarding the addition of Rs. 7,71,00,000/- • TPO ought to have accepted the basis and working of operating profit margin (for short OPM) as submitted in the letter dated 30- 10-2006 and 9-11-2006. • TPO has bifurcated the profit and loss account into DTA and EOU unit separately and compared the OPM of the comparable companies as a whole with OPM of DTA units. TPO ought to have made a comparison at Company level without bifurcating the business in segment wise. • TPO has calculated PBIT as against the PBDT. • TPO has excluded two companies and added one new company in a comparable list of companies without giving the opportunity.

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• PBIT of it (assesses) is 13% as computed vide its letter dated 9.11.2006 while TPO computed at 10.03% without giving the opportunity.

Regarding the addition of Rs. 1,12,41,715/- for royalty for EOU division: • The technology keeps on regularly updating which requires a cost in such up-gradation. Therefore it cannot be assumed that the AE has recovered the cost of the technology incurred by it in the earlier years. Thus the technology cost cannot be assumed as nil. • The adjustment on account of royalty payment has been made by the TPO without any method as prescribed under the law.

12.8 However the AO rejected the contention of the assessee and made an addition of Rs. 7,71,00,000/-as proposed by TPO in DTA unit.

12.9 Regarding royalty expenditure the AO observed that the actual royalty amount in EOU unit is of Rs.1,46,67,000/- which needs to be disallowed.

12.10 In view of the above, the aggregate amount of Rs. 9,17,67,000/- ( 7,71,00,000/- + 1,46,67,000) was added to total income of the assessee.

The aggrieved assessee preferred an appeal before the Ld.CIT (A).

Regarding the addition of Rs.1,46,67,000/- for royalty payment.

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• EOU made payment to its AE for the use of the technology as per agreement which has been renewed from time to time. The SIA, GOI, and RBI have approved the said agreement. • Further, the assessee submitted that the Ld. CIT-A has decided the issue of royalty payment in respect of the EOU units in its case for the AY 2002-03 and 2003-04 where the royalty @ 1.50% was allowed.

13.1 The Ld. CIT (A) after considering the submission of the assessee and the order of his predecessor for AY 2002-03 held that royalty @1.50% represents ALP.

Regarding the addition of Rs. 7,71,00,00/- in respect of DTA segment only. • The assessee worked out the Profit margin at 6.97% whereas TPO worked out profit margin at 10.66%. • TPO has calculated profit margin at 10.66% taking PBDIT, while the assessee calculated the profit margin at 6.97% taking profit after depreciation. The assessee further submitted that comparison made by the TPO is like comparing oranges with apple. It has argued that if the depreciation amounting to Rs. 13.46 crores of DTA segment is added to the profit margin, then the profit for DTA segment would work out to 13.40% which is higher than profit margin 10.66% of the comparables as computed by TPO. • Further, the assessee submitted that TPO excluded two comparable namely Deccan Bearing and HMT Bearing Ltd on the reason that these companies are consistently incurring losses. Therefore the same cannot be considered for working out the profit margin of the comparables. The assessee also submitted that Deccan Bearing is not incurring losses continuously but losses were incurred only in the year 2002-03 and

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2003-04. Therefore the TPO was not correct to exclude the same from working of comparable margins. • Further, regarding the inclusion of MBL, it is submitted that MBL is not comparable one since out of total sales of MBL only 11.57% belong to sales of bearing while 44% belong to sales of bushes. • Without prejudice to its claims as stated above that it has further made a reference to the order of the Ld.CIT (A)-111, Baroda for AY 2002-03 in its own case who held that profit margin cannot be applied to the entire sales of DTA unit and profit margin should be applied only to the transaction with AE. The assessee further submitted that if the same is followed, the addition would work out to Rs. 81,00,848/- (21,95,35,197/- *3.69%) only as against the addition of Rs. 7,71,00,000/-.

13.2 The Ld. CIT (A) after considering the submission made by assessee held that difference of profit margin of 3.69% (10.66-6.97) should be applied in respect of the transaction with the AE only. Accordingly the Ld. CIT-A directed the AO to re-work the disallowance on this basis and check the arithmetical accuracy of the appellant’s submission.

Being aggrieved by the order of Ld.CIT (A), Revenue and the assessee are in appeal before us. The Revenue is in the appeal for Rs. 7,38,23,552/- (royalty payment of Rs. 48,24,400/-+ margin of DTA unit 6,89,99,152/-) and the assessee is in appeal for Rs 1,79,43,448/-( royalty payment of Rs. 98,42,600/- + margin of DTA unit 81,00,848/-).

The assessee has raised the following ground in ITA bearing No.80/Ahd/2008 for A.Y. 2004-05.

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The CIT(A) erred in holding that royalty and FTS paid to the extent of only 1.5% of sales may be treated as ALP thus confirming addition to the extent of Rs.98.42 lakh.

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The TPO and AO erred in determining the comparable margin at 10.66% instead of 6.97 worked out by Appellant.

CIT(A) erred in confirming action of TPO/AO in separating profits of DTA and EOU and comparing profits of DTA on account of lower profits acce3pting comparable margin at 10.66% instead of 6.97%.

CIT(A) erred in confirming allocation of expenses between DTA and EOU on the basis of turnover and not accepting allocation made by the assessee company.

Revenue Ground of Appeal : 3

-CIT(A) erred in reducing the addition of Rs.9.18 crore u/s.92CA(3) to Rs.1.79 crore ignoring the detailed reasons given by the IPO.

The method in 02-03 followed in this year. The TPO has taken segmental accounts of the assessee company and the DTA margins have been adjusted in light of the higher comparable margins.

The use of TNMM at independent transaction level has been advocated in a number of decisions as mentioned in the submission made for AY 2002-03 and reproduced below.

The claim of the assessee that the rejected comparable i.e. Deccan Bearings Ltd was a proper comparable is incorrect in light of the low turnover as compared to the assessee. Turnover filters have been held to be valid filters by various courts. As far as the profitability of the company is concerned, it is seen that if the other income is reduced to determine the operating margin, the operating margin of this company is always in negative. (Accounts enclosed)

The CIT(A) has failed to notice that in AY 2002-03, the CIT(A) had benchmarked the transaction of royalty and technical knowhow separately by bechmarking them at 1.5% and then the remaining transactions were benchmarked at the differential amount. In his order, the TPO has specifically mentioned that he is not benchmarking the royalty transaction in light of the TNMM study of the entire manufacturing segment.

Once the CIT(A) has not accepted the DTA unit benchmarking %age, he should have followed the process adopted by the CIT(A) in AY 02-03 i.e.

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benchmarking royalty separately and then benchmarking the remaining transactions.”

Both the Ld. DR and the AR before us vehemently supported the order of authorities below as favorable to them.

Finding of the ITAT in Assessee’s appeal ITA No. 793/AHD/2006 in respect of adjustment in DTA segment “28.3. We have considered the rival contentions of the respective representative parties. We find force into the contention of the ld.counsel for the assessee that the Artificial Bifurcation of DTA and EOU is de hors the provisions of Law, DTA Segment has no exports but comparable companies has exports and incorrect computation by the ld.CIT(A). It is pointed out by the ld. counsel for the assessee that it can be seen that the figure of Rs.8,43,42,316/- is arrived at by the following method:- a. International Transactions in the nature of Revenue Expenses debited to the Profit and Loss Account (other than Royalty) of Rs.4,01,14,355 (Rs.8,88,38,750 minus 4,87,24,395 of Royalty). b. Added to above, the Royalty of the DTA Segment of Rs.4,87,24,395 giving aggregate of Rs.8,88,38,750. c. Added to above, the International Transaction in the nature of Revenue Expenditure CREDITED to at the P&L Account of Rs.74,03,728. d. Added to above, the International Transaction in the nature of capital Goods, part of the Balance Sheet of Rs.5,19,25,936, aggregating to Rs.14,81,68,414.

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e. From the above, reduction of the Royalty (of DTA and EOU Segment both) of Rs.6,38,26,098. It may be noted that Royalty of EOU of Rs.1,51,01,703 was not included in the above aggregate. Despite this fact, it was reduced from the aggregate.

The ld. counsel for the assessee submitted that for the purpose of benchmarking the international transactions the assessee had bifurcated its activities into manufacturing segment and distribution segment. However, the Transfer Pricing Officer (TPO) has further bifurcated the activities of the assessee into domestic unit (DTA) and export oriented unit (EOU). Thus, the TPO artificially divided the manufacturing segment into two sub-segments, i.e. for exports and for domestic sales, but however kept the set of comparable companies same for both EOU and DTA. The ld.counsel for the assessee invited our attention towards the bifurcation of the International Transactions.

Item-wise description of the International Transactions as contained on page-3 of the TPO's order. However, the ld.CIT(A) vide paras 10.7.2 to 10.7.4 in his order has held that the differential margin of the DTA segment and comparables should be applied only to the international transactions with AEs and not on the entire turnover of the DTA unit. Therefore, ld.CIT(A) has restricted the addition on account of lower margins of the DTA to Rs.59,12,396/- as against Rs.13.84 crores made by the TPO. This is duly supported by the decisions of the Coordinate Benches in the following cases:-

(i) Phoenix Mecano (India) Ltd. vs. DCIT (2012) 17 taxmann.com 119 (Mum) (ii) M/s.Genisys Integrating Systems (India) Pvt.Ltd. vs. DCIT (2013) 152 TTJ 215 (Bangalore) (iii) Pennzoil Quaker State India Ltd. (2012) 26 taxmann.com 124 (Mum.) I T A No s . (iv) Lionbridge Technologies Pvt.Ltd. (2012) 137 ITD 197 (Mum.) 28.4. There is no fault can be found from the order of the ld.CIT(A) so far as restricting the addition on account of differential operating margin to the international transactions is concerned. However, the figure of Rs.8,43,42,316/- as worked out by the ld.CIT(A) is not correct, therefore this issue is required to be restored to the file of ld.CIT(A) for recomputation of the international transactions. Needless to say that the ld.CIT(A) would give sufficient opportunity of being heard to both the parties. Thus, ground No.6 is allowed for statistical purposes.

Finding of the ITAT in Assessee’s appeal ITA No. 793/AHD/2006 in respect of adjustment in Royalty segment

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party of the assessee for the earlier period. It is also the contention of the assessee that no material is available on record that any enquiry of any nature has been carried out by any person including TPO to conclude that the transactions of SKF and for the earlier years for the assessee were the correct ALP or were done in circumstances so as to be at the ALP. The contention is that the only available option is to adopt TNMM as the method for determination of the ALP. 29.1. We have given our thoughtful consideration to the rival contentions. We find force into the contention of the ld.counsel for the assessee, therefore, we are of the considered view that the ld.CIT(A) and TPO were not justified in adopting the CUP method and, therefore, we direct the ld.CIT(A) to adopt the method of TNMM for determination of the ALP and recompute the ALP in respect of the royalty. Thus, this ground of assessee's appeal is also restored back to the file of ld.CIT(A) for recomputation of ALP after giving an opportunity of being heard to both the parties. Ground No.7 of assessee's appeal is allowed for statistical purposes.”

Finding of the ITAT in Revenue’s appeal ITA No. 817/AHD/2006 in respect of DTA and royalty adjustment “59. Before us, both the parties submitted that the ground nos. II to IV raised in Revenue’s appeal are identical to the grounds raised in assessee’s appeal in ITA No. 793/Ahd/2006. We therefore, for the similar reasons stated while deciding the assessee’s appeal hereinabove dismiss the grounds of Revenue’s appeal.”

16.1 As the facts in the case on hand are identical to the facts of the case as discussed above, therefore the same is binding on us as per the judgment of Hon’ble Madras High Court in the case of CIT v. L.G. Ramamurthi 1977 CTR (Mad.) 416 : [1977] 110 ITR 453 (Mad.) which has been elaborated in the preceding paragraph.

16.2 In view of the above and the precedent in the own case of the assessee as discussed above, we restore both the issue, i.e., adjustment in the DTA segment and the royalty payment to the file of Ld.CIT (A) for fresh adjudication and in the light of above discussion as per the provisions of law.

16.3 Hence the grounds of appeal of the assessee are allowed for statistical purposes, and the grounds of appeal of the Revenue are dismissed.

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The interconnected issue raised by the Revenue in ground no. 4, 5 and 6 is regarding the error committed by the ld. CIT-A as detailed below: • Entire depreciation of Rs.2,56,519/- on the residential quarters allocated in the computation of income of DTA units • Entire depreciation of Rs. 34,22,521/- on data processing machines allocated in the computation of income of DTA units. • Entire advertisement expenses of Rs. 2,06,78,311/- allocated in the computation of income of DTA units.

In other words, all the grounds of appeal relate to the apportionment of expenses between DTA and EOU units of the assessee.

Total Amount DTA EOU 1. Depr. On 256,519 222,675 33,844 Residential Building 2 Depr. On Data 3,422,521/- 2,970,974 451,547 Processing Machines 3 Depr. On Motor 1,844,880 1,601,477 243,403 cars 4 Advertisement 20,678,311 17,950,137 2,728,174 Expenses 5 Dep. On Account of SAP-R/3 Cost (60% of Rs.3,29,44,739/-)

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(1,06,93,270/- + 2,22,51,469/-) 19,766,844 17,158,924/- 2,607,920 Depr. On 6 Renovation of Building 31,753 44,925 6,828 Total 46,020,828 39,949,112 6,071,716

17.1 Regarding the above, the assessee submitted as under:- I. Regarding the depreciation on the residential quarters, it was submitted that all the residential units were constructed for the staff of DTA units only. These are old staff quarters and no fresh quarters were constructed for the EOU units. II. Regarding the depreciation on data processing machines, it was submitted that the plant and machinery of the EOU units is very modern and totally computerized and does not require major external support for data processing. As such the entire depreciation is attributable to the DTA unit. III. In respect of depreciation on car it was submitted that the most of the vehicles are used for DTA unit. IV. In respect of advertisement expenses it was submitted that the EOU unit exclusively deals with the group concerns of the assessee only. It does not deal with any outsider party in respects of sales. Hence there is no need to incur the expenses on the advertisements and marketing of its products with group concern. V. In respect of renovation of building, it was submitted that major renovation has taken place in respect of the DTA unit whereas the minor repairs were also in respect of the corporate office building. No part of the expenses pertained to the EOU unit.

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VI. In relation to SAP R3 cost it was submitted that these expenses are not a capital expenditure it should be treated as revenue expenditure.

17.2 However the AO rejected the contention of the assessee by observing as under: a. The assessee has not been able to adduce any evidence to substantiate its claim that the residential quarters were used exclusively by the employee of DTA unit only. Therefore, the depreciation of Rs. 33,844/- out of total depreciation of Rs. 2,56,519/- was allocated to EOU unit and accordingly the remaining amount was added to total the income of the assessee. b. The data processing machines work as network systems to connect all the offices/ units for coordinating various functions of DTA and EOU unit. Therefore the segregation of its use between DTA and EOU unit is not possible. Therefore the depreciation of Rs. 4,51,547/-out of total depreciation of Rs. 34,22,521/- is allocated to EOU unit. Accordingly the same was added to total income of the assessee. c. Regarding the use of the car, the assessee failed to furnish any evidence by way of logbook or any other record to substantiate that the CAR was used exclusively for DTA unit. Moreover, the cars in question are used by the chairman and managing director who are equally responsible for the DTA unit and EOU unit. Therefore depreciation of Rs. 2,43,403/-out of total depreciation of Rs. 18,44,480/- is allocated to EOU unit. Accordingly the same was added to the total income of the assessee.

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d. Regarding the advertisement expenses, it was noticed that it pertains to the company as a whole and therefore it cannot be attributable to any one unit. The ordinary customer in the market whether local or overseas identifies the product with the company and not with the units operating under the umbrella of the company. Therefore expenses of Rs. 27,28,174/-out of Rs. 2,06,78,311/- were allocated to EOU unit and accordingly the same added to the total income of the assessee. e. From the submission of the assessee, it does not reflect that the use of SAP R3 software is limited only to DTA or EOU. Therefore depreciation of Rs. 26,07,920/- out of total depreciation Rs. 1,97,66,844/- allocated to EOU unit and accordingly the same was added to total income of the assessee. f. The assessee has not furnished any evidence to justify that major renovation work was carried out in respect of the DTA unit. Therefore the depreciation of Rs. 6,828/-out of total depreciation Rs. 51,753/- was allocated to EOU unit and accordingly the same was added to total income of the assessee.

17.3 Therefore, in view of above the aggregate addition made by the AO by way of allocation of the expenses to EOU Unit to the total income of the assessee for Rs. 60,71,716/- only.

Aggrieved assessee preferred an appeal before the Ld.CIT (A).

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advertisement expenses. But the Ld. CIT (A) in earlier year 2003-04 deleted the apportionment with regard to deprecation in respect of residential quarters, data processing machines, and in respect of advertisement expenses. However the Ld.CIT (A) confirmed the apportionment with regard to depreciation on motor cars in his order for AY 2003-2004.

18.1 The Ld.CIT (A) after considering the submission of the assessee partly allowed the appeal by observing as under: “I have considered the rival submissions. It is observed that I have cancelled the action of the Assessing Officer with regard to the apportionment of the expenses in respect of the depreciation on residential quarters, depreciation on data processing machines and expenditure on advertisement expenses in my order at Para 28 for A.Y 2003-04. Under the circumstances, in this year also the action of the Assessing Officer with regard to the apportionment of expenses in respect of these three items is cancelled. However, it is seen that the action of the Assessing Officer with regard to the depreciation on motor car had been confirmed. The facts remaining the same, the action of the Assessing Officer in this year is also confirmed. As regards the depreciation of SAP costs, it is observed that the appellant has not brought any material on record to show that the expenditure incurred in this behalf relate only to the activities of the DTA unit and does not relate to the activities of EOU unit. It is observed that SAP R-3 is applied equally to the maintenance of accounts and records of both the DTA and the WOU. Similarly, it has not been shown that the renovation of building is only relating to the DTA building. Under the circumstances, it cannot be said that the expenditure relates only to the DTA unit. Therefore, the re-apportionment of expenditure as done by the Assessing Officer in respect of two claims of expenditure is upheld to be correct.”

Being aggrieved by the order of Ld.CIT (A), the Revenue and the assessee are in appeal before us. The Revenue is in the appeal for the deletion of the following: i) Allocation of depreciation of residential quarters, ii) Allocation of the depreciation on data processing machines iii) Allocation of advertisement expenses

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On the other hand, the assessee is in appeal for the confirmation of addition for the allocation of the following:

i) Allocation of depreciation on motor car, ii) Allocation of depreciation on SAP R3 software, iii) Allocation of depreciation on repairs to building.

The ground of appeal raised by the assessee in ITA bearing No. 80/Ahd/2008 is as under:

“6 The learned CIT(A) erred in fact and in law in confirming action of the AO in allocating the following expenses between DTA unit and EOU in the ratio of their respective turnover despite the fact that the appellant had made detailed submissions with respect to the allocation made by it and it was therefore requested that no further adjustment is required to be made. Particulars Total Amount (Rs.) Allocated to DTA Allocated to EOU (Rs.) (Rs.)

Depreciation on Motor 18,44,880 16,01,477 2,43,403 Car Depreciation on Software 1,97,66,844 1,71,58,924 26,07,920 Upgradation/Development of Addl.Programme of SAP R/3 treated as capital expenditure Depreciation on Repairs 1,03,505 89,850 13,655 to Building TOTAL 2,17,15,229 1,898,50,251 28,64,978”

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2052/AHD/2006 pertaining to AY 2003-2004, the ITAT vide order dated 24- 04-2017 deleted the addition as mentioned below: i) Allocation of the depreciation on data processing machines ii) Allocation of advertisement expenses

20.1 The ITAT in its order as discussed above confirmed the addition as detailed under: i. Allocation of depreciation on motor car

20.2 Both the parties relied on the order of authorities below as favorable to them.

“14. We have heard the rival contentions. We find that there is nothing on record to show that the DTA processing machines have actually been used for the EOU unit We also find merit in the contention of the learned consul that the assessee was not required to market its product to the EOU unit as the entire production was sold to F AG Germany which was responsible for the marketing and selling of the product in foreign markets. In view of the above facts and taking into consideration the detailed finding of the learned Commissioner of Income tax appeal we do not find any reason to interfere in the finding of the learned Commissioner of income tax appeal.”

Regarding the confirmation of the addition (depreciation on motor car)

“37. The assessing officer has allocated the depreciation on motor car between the DTA unit and EOU unit of Rs.3,70,458-. The learned Commissioner of income tax has

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confirmed the action of the assessing officer as assessee has not produced any material to prove that the vehicles were only used for DTA units. We have heard the rival contentions and we do not find any reason to Interfere in the finding of the Ld.CIT(A).”

21.1 In view of the above order being having a binding effect on us, we delete the addition for the allocation made by the AO towards the depreciation on data processing machine and advertisement expenses and confirm the addition made by the AO regarding the depreciation on the car. The AO is directed accordingly to delete/ confirm the addition made by the AO. The relevant extract of the order has already reproduced here-in-above.

Now coming to the issue relating to the depreciation on residential quarters

21.2 The Ld. CIT (A) in the AY 2003-04 deleted the allocation of depreciation on residential quarters made by the AO. On verification of grounds of appeal filed by the Revenue for AY 2003-04 in appeal no. ITA 1976/AHD/2007 it is found that the Revenue has not raised any ground against the action of the Ld.CIT (A) for deletion of allocation of depreciation on residential quarters between DTA and EOU unit. Thus it is clear that once the Revenue has not challenged the action of the Ld.CIT (A), then the order of the Ld.CIT (A) reaches its finality. As such it is settled law that the Revenue cannot challenge the same in the subsequent year until & unless there was some change in the facts and circumstances. Admittedly there was no change in the facts and circumstances regarding the claim of the assessee for the depreciation in respect of residential quarters and its allocation thereof. Therefore we are of the view, that there cannot be any disallowance on account of allocation of the depreciation of the residential quarters. In this regard we find support and guidance from the judgment of Hon’ble supreme

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court in case of Radhasoami Satsang vs. CIT reported in 60 taxman 48 where in it was held as under: “14. On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter—and if there was no change it was in support of the assessee—we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12.”

21.3 In view of the above, we hold that there cannot be any allocation of the depreciation claimed by the assessee in respect of its residential quarters towards the DTA unit.

Now coming to fresh issue of apportionment of depreciation on SAP R3 cost and depreciation on renovation of building.

Regarding the allocation of the depreciation on SAP R3 expenses

21.4 At the outset we note that the SAP R3 expenses have been treated as revenue expenditure by us vide paragraph no. 73 of this order. Thus the question of allocating the depreciation on SAP R3 does not arise.

21.5 However, it is important to note that the AO has not disputed allocation of the expenses of SAP R3 in his order. As such the AO treated such expenses as capital in nature and accordingly the same was disallowed. But the AO allowed the depreciation on such expenses which was allocated between DTA and EOU unit of the assessee. Thus the issue for the allocation of SAP R3 expenses remained untouched by the AO. Thus the question arises whether such expenses need to be allocated between DTA and EOU unit. For this

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limited purpose, we are of the view that the justice will be served to both the assessee and the Revenue if the matter is restored back to the file of AO for fresh adjudication. Accordingly, we set aside the issue to the file of the AO for de novo assessment regarding the allocation of SAP R3 expenses.

Regarding the allocation of the depreciation on renovation of the building

21.6 At the outset, we note that the renovation expenses on the building have been treated as revenue expenditure by us vide paragraph No. 63 of this order. Thus the question of allocating the depreciation on renovation expenses does not arise.

21.7 However, it is important to note that the AO has not disputed the allocation of renovation of the building expenses in his order. As such the AO treated such expenses as capital in nature and accordingly the same was disallowed. But the AO allowed the depreciation on such expenses which was allocated between DTA and EOU unit of the assessee. Thus the issue for the allocation of renovation expenses remained untouched by the AO. Thus the question arises whether such expenses needs to be allocated between DTA and EOU unit. For this limited purpose, we are of the view that the justice will be served to both the assessee and the Revenue if the matter is restored back to the file of AO for fresh adjudication. Accordingly we set aside the issue to the file of the AO for de novo assessment regarding the allocation of impugned renovation expenses.

21.8 In view of the above, the appeal filed by the Revenue is dismissed and the appeal of the assessee is partly allowed for statistical purposes.

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The fifth issue raised by the Department in the ground nos 7(a), 7(b), 7(c) and 7(d) is that the CIT (A) erred in negating the exclusion of 90% of the income from writing back of credit balance and gain from foreign exchange fluctuation.

The issue raised by the assessee in ground No. 7 is interconnected with the issue raised by the Revenue as discussed above. Therefore we have clubbed them together for the sake of convenience.

The issue raised by the assessee in ground No. 7 in ITA 80/AHD/2008 is reproduced as under:

“7. The learned CIT(A) erred in fact and in law in confirming action of the Assessing Officer in reworking deduction u/s.80HHC of the Income Tax Act, 1961 by making various adjustments to the claim of the appellant. a. The learned CIT(A) erred in fact and in law in confirming action of the AO in reducing the following amounts from the profits of business for the purpose of computing deduction u/s.80HHC of the Act on the ground that they do not constitute business income.

Sr.No. Nature of Income Amount (Rs.in lacs) a) Service Income 248.00 b) Income from Investments 14.00 c) Income from UTI 34.00 d) Write Back of Provisions 64.00 e) Misc.Income i) Scrap Sales 70.47 ii) Freight Recovered 6.01 iii) Insurance claim 4.59 iv) Handling Charges 2.65 v) DEPB Income 55.39 vi) Discount on early 12.39 payments of Suppliers

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Bills vii) Octroi Refund 39.00 viii) Reversal of Provisions 19.93 ix) GEB deposit 6.68 x) Others 17.09

b. The learned CIT(A) erred in fact and in law in confirming action of the AO in excluding gross amount of above income from the profits for the purpose of computing deduction u/s.80HHC and no deduction should be granted for expenses incurred for earning the said income.”

• Write back of credit 25,51,856/- • Forex gain 1,16,29,805/- • Service income 2,48,11,456/- • Income from investment 14,00,000/- • Income from UTI 34,00,000/- • Write back of provision 64,00,000/- • Scrap sales 70,47,075/- • Freight recovered 6,01,371/- • Insurance claim 4,59,318/- • Handling charges 2,65,150/- • DEPB income 55,39,540/- • Discount on early payment of suppler bills 12,39,571/- • Octroi refund 39,00,000/- • Reversal of provision 19,92,966/-

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 37

• GEB deposit 6,68,412/- • Others 17,09,574/-

Total 7,36,16,094/-

Aggrieved, assessee preferred an appeal before the Ld.CIT (A).

Note : the finding of the CIT-A & ITAT has been given for all the items listed above in subsequent paragraphs together for the sake of convenience.

In relation to write back of credit balance of creditors/debtors for Rs. 25,51,856/-

CIT-A order

24.1 The Ld.CIT (A) regarding the writing back of old credit balance of Rs. 25,51,856/- noticed that it falls under section 41(1) of the Act. It is because the corresponding amount has been claimed as a deduction in earlier AY. It is clear that any amount of profit construed u/s 41(1) of the Act has to be treated as business income. Therefore the Ld.CIT (A) allowed the assessee appeal.

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ITAT order

Being aggrieved by the order of Ld. CIT (A), Revenue is in appeal before us.

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operational income and not under the head ‘Income from other sources’. Therefore, the said income could not be deducted from the business profits while computing the deduction under section 80HHC of the Income-tax Act. The decisions relied upon by the Tribunal have been distinguished in the case of Bangalore Clothing Co. (supra). In the case of Bangalore Clothing Co. (supra), it is held that the Assessing Officer must ascertain the nature of receipt in each case independently. Interest income may or may not be out of business activity. If it is not part of operational business income, then, the Assessing Officer would have been justified in excluding the same for the purpose of deduction under section 80HHC of the Act. However, in the present case, the Assessing Officer has accepted that the interest income received from customers as well as sales tax set off are assessable under the head ‘Profits & gains of business or profession’. Therefore, having accepted that the said income as part of the business profit, the same could not be excluded from business profits while calculating deduction under section 80HHC of the Act.”

26.1 In addition to the above, we also note that the ITAT Mumbai in case of Extrusion Process (P) Ltd. reported in 106 ITD 336 has also held that the assessee is entitled to deduction under section 80HHC of the Act in respect of the impugned income as discussed above. The relevant extract of the order is reproduced as under:

“We considered the matter in detail. The "profits of the business" means the profits and gains computed under the provisions of sections 28 to 43C of the Income-tax Act, 1961. Section 41(1), comes therefore, among the provisions relating to the computation of business profits/gains. Section 41(1) provides for treating the assessment of liability as income, provided those liabilities were claimed as deductions in computing the taxable income for earlier assessment years. It shows that section 41(1) is not creating any income as such independently without any basis. On the other hand, the income is created under section 41(1) on the ground that the corresponding amounts were claimed as deductions in the earlier assessment years. The profits and gains of the assessee were reduced to that extent in the earlier assessment years. When those liabilities ceased to exist, it is very necessary to write back the liabilities as a result of which the amount needs to be offered as income in the accounts under section 41(1). Therefore, there is no force in the argument of the Revenue that the income deemed under section 41(1) stands alone differently and distinctly from the computation of business income of an assessee provided under the provisions of law contained in sections 28 to 43C.

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26.2 In view of the above, we do not find any reason to interfere in the order of the Ld.CIT-A. Hence the ground of appeal of the Revenue is dismissed.

In relation to Gain on forex Rs. 1,16,29,805/-

CIT-A order

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 41

27.1 The Ld.CIT (A) after considering the submission of the assessee held that foreign exchange fluctuation income has direct nexus with the business of the assessee. Therefore the same is eligible for deduction under section 80HHC of the Act.

ITAT order

Being aggrieved by the order of Ld. CIT (A), Revenue is in appeal before us.

29.1 In addition to the above, we also note that the Delhi ITAT in case of Smt. Sujata Grover (Supra) where in it was held that the assessee is entitled to deduction under section 80HHC of the Act in respect of the impugned income as discussed above. The relevant extract of the order is reproduced as under:

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“Section 80HHC of the Income-tax Act, 1961 - Income from foreign exchange fluctuation resulting from export turnover of earlier years would not fall in category of "any other receipt of a similar nature" as used in Explanation (baa) below section 80HHC(4B)”

29.2 In view of the above, we do not find any reason to interfere in the order of the Ld. CIT-A. Hence the ground of appeal of the Revenue is dismissed.

In relation to service income of Rs. 2,48,11,456.00, scrap sales of Rs. 70,47,075/-, handling charges Rs. 2,65,150, and GEB Rs. 6.68.412/-.

i. Service income includes consultancy fees of Rs. 2,04,83,835/- and inspection charges of Rs. 43,28,111/-. Consultancy fees were received from FAG Germany for providing consultancy service on marketing, industrial & commercial information of the product of FAG Germany in India. The service includes providing customer education by arranging seminars, conferences, exhibition, and distribution of technical information in respect of product of FAG Germany. ii. Regarding the inspection charges, the company deputes the engineers to certify the genuineness of FAG bearings. The company charge fees for the said service as inspection charges. This income is purely related to business of the assessee. The assessee in support of his claim relied on the Judgment of Bombay High Court in the case of CIT v/s International Data Management Ltd. Reported in 261 ITR 177.

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iii. Income from sale of scrap is directly related to the manufacturing activity of the appellant because it is generated due to the manufacturing process of the assessee. Similarly appellant has relied on the judgment of ITAT (Chennai Bench) in the case of JCIT v/s Kadri Mills (CBE) Ltd. reported in 76 TTJ 38. iv. Regarding the business income of loading and unloading charges, the assessee submitted that these are connected with the business. Therefore it is a business income. v. GEB deposit was kept for obtaining an electric connection. Thereforeit is the business income.

CIT-A order

30.1 The Ld.CIT (A) observed that the aforesaid income cannot be treated as business income of the assessee. Therefore the Ld. CIT-A held that such income is not eligible for the deduction under section 80HHC of the Act.

ITAT order

Being aggrieved by the order of Ld. CIT (A), assessee is in appeal before us.

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In relation to service income of Rs. 2,48,11,456.00

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reckonedfor the purposes of section 80HHC. The Assessing Officer will apply the law as explained in the judgments of the Kerala High Court which have been affirmed by the Supreme Court. (iv) Where surplus funds are parked with the bank and interest is earned thereon, it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC. (v) Interest earned on fixed deposits for the purposes of availing credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. (vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted to, in terms of section 37, claim as deduction, expenditure laid out for the purposes of earning such business income. (vii) In the second stage, the Assessing Officer will deduct from the profits of the business computed under the head "Profits and gains of business or profession", the following sums in order to arrive at the "profits of the business" for the purposes of section 80HHC (3): (a) 90 per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28, i.e., export incentives; (b) 90 per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India (viii) The word "interest" in clause (baa) of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such interest, the Assessing Officer will take into account the net interest, i.e ., gross interest as reduced by expenditure incurred for earning such interest. (ix) Where, as a result of the computation of profits and gains of business or profession, the Assessing Officer treats the interest receipt as business income, the deduction should be permissible in terms of Explanation (baa) of the net interest, i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle.

33.1 The case law relied upon by the assessee before the AO/CIT-A does not apply to the facts of the case on hand. As such the case law relied upon by the AO/CIT-A is distinguishable from the facts of the present case. Therefore

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we are reluctant to place our reliance on the said case law. Hence, the ground of appeal of the assessee is partly allowed.

Sale of scrap and insurance claim and handling charges

33.2 We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC of the Act. In holding so, we find support and guidance from the judgment of Hon’ble Bombay High Court in the case ofAlfa Laval India Ltd Vs. DCIT reported in 133 taxman 740 wherein the issue was decided in favour of the assessee. The relevant extract has already been reproduced in the preceding paragraph.

33.3 In addition to the above, we also note that the ITAT (Chennai Bench) in the case of JCIT v/s Kadri Mills (CBE) Ltd. reported in 76 TTJ 38 has also held that the assessee is entitled to deduction under section 80HHC of the Act in respect of the impugned income as discussed above. The relevant extract of the order is reproduced as under:

“We have heard rival submissions and considered the facts and materials available on record including that of the decisions relied upon by both the parties. After a careful consideration of the same, we are of the opinion that the Expln. (baa) of sub-section (4B) of section80HHC speaks of only "Profits of business" as computed under the head "Profits and gains of business or profession" and not profits derived from export. Further, the items of receipts such as miscellaneous incomes like gunny bag sales, scrap sales, insurance claim, premium on hank yarn obligation, etc. do not have even a semblance of the items mentioned in Expln.

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(baa) viz., brokerage, commission, interest, rent, charges or any other receipts of similar nature. The purpose of Expln. (baa) is only to exclude certain items mentioned therein while arriving at the "profits of the business" and not the profits derived from the export. There is force in the contention of the learned counsel that the case laws relied upon by the learned Departmental Representative are not relevant or applicable to the facts of the case on hand as we are not arriving at the income derived from export as contended by the learned Departmental Representative but only arriving at the profits of the business. Hence, we are of the opinion that the Revenue authorities have committed a mistake in removing these items of income from the profits of the business while computing deduction under s. 80HHC of the Act. Hence, we direct the AO not to exclude the above items as not forming part of business profits in computing relief under s. 80HHC of the Act.”

33.4 In view of the above, we reverse the order of the Ld. CIT-A. Hence the ground of appeal of the assessee is allowed.

Interest income from GEB Rs. 6,68,412/-

33.5 We have heard the rival contentions of both the parties and perused the materials available on record. The deduction under section 80HHC is available to the assessee in respect of export of the goods. The provisions of this section do not speak about the deduction in respect of interest income from GEB. Therefore in our considered view, the assessee is not entitled to the deduction under section 80HHC of the Act in respect of such income. However, the assessee is entitled to the deduction for the expenses incurred by it against such income. Therefore we direct the AO to reduce the expenses incurred by the assessee from the interest income as discussed above. Thus the AO will reduce 90% of the balanced interest income for working out the profit of the business eligible for deduction under section 80 HHC of the Act. As such the AO will consider only the net income of the assessee before reducing 90% of the interest income while working out the deduction under section 80HHC of the Act. In this regard, we place our reliance on the order

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of the Hon’ble Delhi HC in case of CIT Vs. Shri Ram Honda power equip reported in 207 CTR 689. The relevant extract of the judgment has been reproduced in the preceding paragraph.

33.6 In view of the above the ground of appeal of the assessee is partly allowed.

In relation to Income from investment and income from UTI

CIT-A order 34.1 The Ld.CIT (A) observed that the Interest earned on fixed deposit to avail credit facilities from the bank does not have an immediate nexus with the export business. Therefore it has to be treated as income from other sources. Thus income from investment and UTI is held that it is not business income. Therefore, the Ld. CIT-A confirmed the order of the AO.

ITAT order

Being aggrieved by the order of Ld. CIT (A), the assessee is in appeal before us.

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36.1 In view of the above, the ground of appeal of the assessee is partly allowed.

In relation to freight recovered of Rs. 6,01,371/-, Insurance claim/sale tax claim/CST refund Rs. 4,59,318.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 50

CIT-A order

37.1 The Ld.CIT (A) regarding the freight and insurance claim observed that these receipts are in the nature of income, but the same cannot be said to be business income. Therefore the Ld. CIT-A confirmed the action of the AO.

ITAT order

Being aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before us.

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39.1 In view of the above, we reverse the order of the Ld. CIT-A. Hence the ground of appeal of the assessee is allowed.

In relation to DEPB income Rs. 55,39,540.

40.1 The Ld.CIT (A) observed that the assessee company having a turnover exceeding Rs. 10 crores but the assessee failed to satisfy the condition specified in the third proviso to section 80HHC(3) of the Act. Therefore the Ld. CIT-A confirmed the action of the AO.

ITAT order

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Being aggrieved by the order of Ld. CIT (A), the assessee is in appeal before us.

42.1 In view of the above, we are inclined to reverse the order of the Ld. CIT-A. Accordingly, we direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act. Hence the ground of appeal of the assessee is allowed.

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In relation to a discount of early payment of suppliers bill of Rs. 12,39,571/-

43.1 The Ld.CIT (A) observed that the discount on earlier payment to supplier is not a trade discount but a cash discount. Therefore discount received by the assessee on account of earlier payment is in the nature of interest. Thus the AO correctly excluded it from the income eligible for deduction u/s 80HHC of the Act.

ITAT order

Being aggrieved by the order of Ld. CIT (A), the assessee is in appeal before us.

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46.1 In addition to the above we also note that Hon’ble Rajasthan HC in case of CIT Vs. Sharda Gum & chemicals reported in 209 CTR 143has also held that the assessee is entitled to the deduction under section 80HHC of the Act in respect of the impugned income as discussed above. The relevant extract of the order is reproduced as under: “The Tribunal has found that the assessee in the course of its business has borrowed sums and paid interest and bank commission to the tune of Rs. 14,33,528.32 which were allowable deduction. As against payment of interest and bank commission, the assessee has also received interest and, therefore, the net outgoing under the head of interest has been stated to be Rs. 13,06,081.92 which has been deducted while computing profits of business. It has also been noticed by the Tribunal that interest income to the tune of Rs. 68,534 directly related to the export business as such excess interest earned was credited by the bank on early payment of foreign bills of exchange. These findings are findings of fact. The Assessing Officer also while reducing the profit of business for the purpose of computing income of the assessee has not treated the receipt of interest differently. It clearly goes to show that while computing the taxable income of the assessee he has taken the basis as profit shown as profit and loss account which included deduction on account of outgoing of interest as noticed above. No separate treatment has been given by the Assessing Officer in considering the income from interest receipt. Neither has he adjusted the profits shown in the profit and loss account by making addition of Rs. 1,27,000 as income from interest to be treated separately nor has such income been computed under the head of income from any other sources. Under these circumstances, there is no reason to reduce profit of

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business as computed under the head of profits and gains of business further by such amount of interest received by the assessee after adjusting deduction allowable under section 32AB. We, therefore, find that the order of the Tribunal does not call for any interference. It may be noticed that this amount was directly related to credit earned by the assessee in respect of his export business on account of early payment of foreign exchange bills, hence was really part of income from business of export. Had the assessee been engaged in business of exporting goods and merchandise out of India, such amount have become part of income from such business only being incidental to such trade only.”

46.2 In view of the above, we are inclined to reverse the order of the Ld.CIT (A). Accordingly, we direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act. Hence the ground of appeal of the assessee is allowed.

In relation to octroi refund Rs. 39,00,000/-, reversal of the provisions, for the excise duty for Rs.8,99,158/-and for the testing charges Rs.10,93,808/-.

47.1 The assessee regarding the provision of excise duty and testing charges submitted that it has been made out of the profit of the company. Therefore at the time of reversal, it should be treated as income of the assessee.

CIT-A order

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47.2 The Ld.CIT (A) confirmed the order of the AO by observing that the facts of the case on which assessee has relied do not apply to the assessee case.

ITAT order

Being aggrieved by the order of Ld. CIT (A), the assessee is in appeal before us.

49.1 In view of the above, we are inclined to reverse the order of the Ld.CIT (A). Accordingly we direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act. Hence the ground of appeal of the assessee is allowed.

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In relation to other Rs. 17,09,574/-

In relation write back of provision of Rs. 64,00,000.00

The issue raised by the Revenue in ground no. 8(a),8(b),8(c) and 8(d) is that the Ld. CIT (A) erred in including the profit & export turnover of EOU units eligible for tax holiday u/s 10B of the Act in the computation of deduction u/s 80HHC of the Act.

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54.1 Therefore the AO was of the view that the assessee is claiming the double benefit for the profit of the EOU under section 80HHC & 10B of the Act which is against the provision of the law. Accordingly, the AO excluded the profit and turnover of EOU unit while computing the deduction u/s 80HHC of the Act.

“34. I have considered the rival submissions. It is observed that the similar issue came up before me in the appellant’s own case for a.y. 2003-04 wherein I have decided the issue in favour of the appellant as at Para 46 of my order dated 19/02/007. Following the same, the action of the Assessing Officer in excluding the profits and turnover of EOU for the purposes of claiming deduction u/s.80HHC is cancelled.”

Being aggrieved by the order of the Ld.CIT (A) the Revenue is appeal before us.

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“20. We have heard the rival contentions. We have also perused the judicial pronouncement referred by the learned DR in the case of TATA BP SOLAR INDIA limited versus Additional Commissioner of income tax of ITA No. 3381 Mumbai/2009/A.Y. 2004-05. We find that in this case it was held that export turnover of the EOU which was enjoying deduction under section 10B was to be included in the total turnover but not in the computation of deduction under section 80HHC(3)(a).The relevant part of this judicial pronouncement is reproduced as under:- "We have already seen the provisions of s. 80HHC(3)(a) of the Act, which refers to profits derived from export of goods manufactured then the profit derived from such export shall be the amount which bears to the profits of the business the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. The expression "such" before the expression export turnover only means that the export turnover referred to is the turnover of the goods manufactured whose profits are being computed under s. 80HHC(3)(a). We cannot therefore ignore the intention of the legislature expressed in such clear terms. With regard to the submission of the learned counsel for the assessee that the profits of business should be increased by adding profits of s. 10B units also, we are of the view that the profits of s. 10B unit fall under Chapter III of the Act under the head income which do not form part of the total income. Therefore, the profits of s. 10B unit will not enter the computation of total income at all. The said profits cannot therefore form part of the profits under the head "Profits and gains of business or profession". For all the above reasons we are of the view that the order of CIT directing the AO to include export turnover also as part of the totalturnover was correct and does not call for any interference."

We find that the facts in the case of the assessee are identical to the facts of the case decided by the Mumbai ITAT in the case referred supra in this order. we also consider that The expression "such" before the expression export turnover only means that the export turnover referred to is the turnover of the goods

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manufactured whose profits are being computed under s. 80HHC(3)(a).Therefore, we find that while computing deduction under section 80HHC the profits of s. 10B unit will not enter the computation of total income at all. In view of above facts and legal findings, we reverse the decision of the Ld.CIT(A) and confirm the findings of the assessing officer and direct to compute the deduction u/s 80HHC accordingly as per the direction given in the judicial pronouncement of ITAT Mumbai in the case of TATA BP SOLAR INDIA limited versus Additional Commissioner of income tax of ITA No. 3381 Mumbai/2009/A.Y. 2004-05.”

58.1 As the facts in the case on hand are identical to the facts of the case as discussed above, therefore respectfully following the same. Hence the ground of appeal of the Revenue is allowed.

In the result, the appeal of the Revenue is partly allowed.

Now coming to ITA no 80/Ahd/2008 for A.Y.2004-05.

The assessee has raised the following grounds of appeal as under:

All the grounds of appeal in this appeal are mutually exclusive and without prejudice to each other 1. The learned Commissioner of Income Tax (Appeals) - I, Barocla ["'the CIT(A)"] erred in fact and in law in confirming action of The Asstt, Commissioner of Income Tax, Circle - 1(2). Baroda ("the AO") in treating expenses in the nature of repairs to building amounting to Rs. 10,35,052 as capital expenditure instead of revenue expenditure as claimed by the appellant. 2. The learned C1T(A) erred in fact and in law in confirming action of the AO in making addition of Rs. 67.07,658 by disallowing expenditure on scientific research claimed u/s, 35(1) of the Act despite the fact that the appellant had furnished complete details for substantiating the claim. 3. The learned C1T(A) erred in fact and in law in confirming action of the AO in considering SAP R/3 running cost amounting to Rs, 3,29,44,739 as capital expenditure, .. 4. The learned CIT(A) erred in fact and in law in confirming the action of the AO in including an amount of Rs. 1,58.86.554 in the total income of the appellant on the ground that the valuation of the closing stock is required to be done by including therein the unutilized cenvat credit, despite the fact that the sum was already shcmn as current asset and not claimed as deduction.

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The learned AO also erred in fact and in law in not valuing the opening stock tor the year under consideration by the same method by including therein the amount of CENVAT credit. .. , 5. The Ld, CIT (A) erred in fact and in law in partially confirming the adjustment proposed by the Transfer Pricing Officer - IV. West Zone. India ("the TPO") / AO U/s, 92 C r.w.s, 92 (1) in respect of international transaction in as much as it pertained to part of the royalty paid amounting to Rs, 98,42.600 and in respect of other international transactions amounting to Rs. 81,00,848 and thus confirming the adjustment to the income of the Appellant aggregating to Rs. 1,79,43,448. a. The TPO and AO also erred in fact and in law in rejecting the Report in Form No. 3CEB despite the fact that all the facts and figures mentioned therein were correct. b. The TPO and AO also erred in fact and in law in computing arm's length price of the international transactions on a basis different than that adopted bv the appellant company despite the fact that the appellant had correctly computed arm's length price and had obtained the certificate thereon from Chartered Accountant for the same. c. The Ld. CIT (A) also erred in fact and in law in holding that Royalty and Fees for Technical Services paid to the extent of only (a), 1,5 % of the sales value may he treated as arm's length price and balance was required to be adjusted under Chapter X of the Act and thus continuing the adjustment to the extent of Rs. 98,42,600 on this count. d. The TPO and AO also erred in fact and in law in determining the comparable profit margin at 10,66 % instead of 6,97 % worked out by the Appellant. e, I he Ld, CI1 (A) also erred in fad and in law in confirming the action of \ the TPO / AO in separating the profits of the Appellant Company in respect of Domestic Tariff Area Units and then comparing the same with composite profits of other cases, which included the export profits and thus confirming adjustment of Rs, 81.00.848 the alleged ground of lower comparable profits and thereby confirming action ofthe TPO and AO in determining the comparable profit margin (ci 10.66% instead of 6,97 %,

6 The learned CIT(A) erred in fact and in law in confirming action of the AO in allocating the following expenses between DTA unit and EOU in the ratio of their respective turnover despite the fact that the appellant had made detailed submissions with respect to the allocation made by it and it was therefore requested that no further adjustment is required to be made. Particulars Total Allocated to Allocated to Amount (Rs.) (Rs.) EOU (Rs.)

Depreciation on Motor Car 18,44.880 16,01,477 2,43.403

1.71.58,924 26,07.920 Depreciation on Software Upgradation / 1.97.66.844 Development of Addl, Programme of SAP R/3 treated as capital expenditure

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Depreciation on Repairs to Building 1.03.505 89,850 13.655 | TOTAL 2,17,15,229 1,88,50,251 28,64,978

b) Income from Investments 14.00

C) Income from UTI 34.00

d) Write Back of Provisions 64.00

e) Misc. Income

i) Scrap Sales 70,47

ii) Freight Recovered 6.01

iii) Insurance claim 4.59

iv) Handling Charges 2lT

v) DEPB Income 55.39

12.39 vi) Discount on early payments of Suppliers Bills vii) Octroi Refund 39.00

viii)Reversal of Provisions 19.93

ix) GEB deposit 6.68.,

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x) Others 17.09

b. The learned C1T(A) erred in fact and in law in confirming action of the AO in excluding gross amount ot above income from the profits for the purpose of computing deduction u/'s.80HHC and no deduction should be granted tor expenses incurred for earning the said income. 8. The learned CIT(A) erred in fact and in law in rejecting the following additional ground of appeal: The learned AO erred in fact and in law in not re-computing the depreciation allowable for the vear after taking into consideration various items of revenue expenditure treated as capital expenditure in the assessment and appellate proceedings," 9. The learned C1T (A) erred in fact and in law in confirming the action of the AO in charaina interest u/s. 234B of the income Tax Act. 1961. 10. The learned CIT(A) erred in fact and in law in confirming the action of the AO in charging interest u/s.234D of the Income Tax Act 1961. 11. The learned CIT(A) erred in fact and in law in confirming the action of the AO in withdrawing interest u/s.244A of the Income Tax Act, 1961. 12. The learned CIT(A) erred in fact and in law in forming the initiation of penalty proceedings u/s.271(1)(c) of the Act.

The first issue raised by the Assessee in ground no. 1 is that the Ld.CIT (A) erred in fact and law treating repairs to building amounting to RS. 10,35,052/- as capital expenditure instead of revenue expenditure as claimed it.

59.1 It is also submitted by the assessee that value of Gross block of building of Rs. 1779 lacs. However the renovation and modernization

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expenses amounting to Rs. 10.35 lacs only which is only 0.6% of the total value of the assets.

59.2 Further assessee submitted that during the year under consideration the company already treated 209.90 lacs as capital expenditure being extension and expansion of the buildings.

59.3 However, the AO rejected the contention of the assessee and relied on the SC judgment in the case Ballimal Naval Kishore VS CIT reported in 224 ITR 414 and considered as capital expenditure. Further the AO pointed out that the assessee claimed theses expenses by way deduction in the computation of income and not debited theses expenses to P&L accounts. Accordingly the AO treated these expenses as capital in nature and allowed dep. @ 5 % amounting to Rs. 51,753/- and remaining balance amounting to Rs. 9,83,299/-added to the total income of the assessee.

Aggrieved assessee preferred an appeal before the Ld.CIT (A).

60.1 The Ld.CIT (A) has confirmed the order of the AO after having reliance on the order of his predecessor pertaining to the assessment year 2003-04 where the expenses as discussed above were treated as capital in nature and depreciation was allowed at the rate of 10% on such expenses.

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Being aggrieved by the order of Ld.CIT (A), the assessee is in appeal before us.

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63.1 Regarding this we also find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Bharat Suryodaya Mills Co. Ltd. reported in 202 ITR 942 wherein it was held as under: “An old wall was required to be rebuilt because of demolition. Thus, the expenditure which was incurred was more in the nature of repairs rather than creation of a new capital asset. A wall was required to be built by the assessee as a necessity for running his business. The Tribunal was, therefore, right in holding that the expenditure was allowable as revenue expenditure.”

63.2 We also note that, the case law relied upon by the AO i.e. Ballimal Naval Kishore & another VS. CIT is distinguishable from the present facts of the case. In that case the Hon’ble Apex Court observed that there was a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. However in the instant case before us, there was mere repair on the existing building. There was no change brought to our notice about the structural in the existing building out of such expenses.

63.3 In view of the above, we disagree with the finding of the Ld. CIT-A. Accordingly we direct the AO to delete the addition made by him by treating the repairing expenses as capital in nature. Hence the ground of appeal of the assessee is allowed.

The Second issue raised by the assessee in ground no 2 is that the Ld.CIT (A) erred in disallowing the expenditure on scientific research claimed u/s 35(1) of the Act amounting to Rs. 67,07,658/-.

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plant and machinery for the R&D division. The assessee to justify such expenses submitted as under: i. The market and economic function for the product is different in the different area. Therefore it is necessary to make product as per local market requirement. Further in all these market various types of raw material, different quality at different price are available. ii. The above stated expenditure has been incurred for development and improvement of the product keeping in mind the Indian market and condition, iii. R& D expenses incurred to find out the most cost effective solution for the material which is produced under foreign technology. iv. To optimize the use and cost of the plant and machineries to be imported from outside India viz a viz to be procured within India.

64.1 However, the AO disagreed with contentions of the assessee by observing as under: i. The research and development activities carried out by assessee has neither been enlisted nor substantiated. ii. Moreover assessee has not given any evidence on record showing the result of such R & D activities conducted at the research and development facility. iii. Further the assessee has been in business since long, however no other new products have been manufactured by it.

64.2 In view of the above, the AO concluded that the above stated expenditure is not admissible under section 35(1) of the Act and accordingly disallowed the same. The same was added to the total income of the assessee.

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Aggrieved assessee preferred an appeal before the Ld.CIT (A).

65.1 The assessee also claimed to have acquired these machineries exclusively for R & D division and it has developed new variety of bearing namely “Taper roller bearings”.

65.2 The above machines are used to check the quality of the component used in the manufactured product. These machine are also used to measure the validation of life of the product

65.3 The assessee is required to carry out continuous up-gradation modification in the design of the bearings as per requirement of the customers. Accordingly it is doing the R&D activity to improve the design of the bearings. Therefore the machines are also used for development and improvement of the product

65.4 Without prejudice to the above, the assessee also submitted that in case the deduction u/s 35(i)(iv) of the Act is not allowed then it is entitled for the depreciation at applicable rate.

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65.5 The Ld. CIT (A) after considering the submission of assessee observed that the activities carried by the assessee as discussed above are not the nature of scientific research as specified u/s 35(1)(iv) of the Act. As such the scientific research would mean an activity that result in a substantial contribution to the existing fund of knowledge on the subject.

65.6 Further, activity in the nature of carrying out development to the existing knowledge/equipment/processes etc will not fall into the category of scientific research.

65.7 In view of the above, the Ld.CIT (A) held that activity in the nature of quality control, testing and style changes do not constitute scientific research. Thus the expenditure incurred on the purchase of the equipment used in undertaking such activity is not eligible for deduction u/s 35(1)(iv) of the Act. However, the Ld.CIT (A), treating such expenditure as in the nature of capital, allowed the deprecation.

Being aggrieved by the order of Ld.CIT (A) the assessee is in appeal before us.

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68.1 A plain reading of the provision of section 35(1)(iv) reveals that the capital expenses incurred for the purpose of scientific research can be claimed as deduction. Further scientific research is defined u/s 43(4) of the Act. The relevant extract as read under: Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires 75— XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXX 4) 97[(i) “scientific research” means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries;] (ii) references to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provision of facilities for the prosecution, of scientific research, but do not include any expenditure incurred in the acquisition of rights in, or arising out of, scientific research; (iii) references to scientific research related to a business or class of business include—

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(a) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class; (b) any scientific research of a medical nature which has a special relation to the welfare of workers employed in that business or, as the case may be, all businesses of that class;

68.2 It is clear from the definition of the scientific research defined u/s 43(4)(iii) of the Act that any activity of scientific research which may lead to or facilitate the extension of the business is eligible for the deduction under section 35 of the Act.

68.3 From the submission of the assessee as discussed above, it appears that the assessee has conducted the scientific research activity and therefore the assessee is eligible for deduction in respect of capital expenditure under section 35 of the Act. However, the onus lies on the assessee to prove on the basis of documentary evidence that it has carried out the scientific research activity. These evidences may include the following: i. The dedicated staff of the assessee engaged in scientific research activity along with the experience, qualification etc. ii. The project Details on which the assessee is conducting scientific research activity. What was the outcome of such scientific research activity whether it was of failure or successful. If successful, what was the impact on the business. iii. Any testing activity was carried out by the assessee on such scientific research activity by any independent agency. iv. Whether the assessee has applied to any government agency for the certification of such scientific research activity. v. The details of revenue expenses incurred by the assessee in relation to such activity.

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vi. The minutes of the board meetings in which the activity of scientific research was approved and there was some budget allocation made for such activities. vii. The necessary details of the scientific instruments used by the assessee and the manner in which these scientific instruments were helpful in conducting such scientific research.

68.4 As such we note that, the Ld.AR for the assessee before us has not brought any iota of evidence suggesting that the assessee has carried out any scientific research activity. Thus in the absence of sufficient documentary evidence, we do not find any reason to disturb the finding of the Ld.CIT (A). Hence the ground of appeal of the assessee is dismissed.

The third issue raised by the Assessee in ground no 3 is that the Ld.CIT (A) erred in treating SAP R/3 running cost amounting to Rs. 3,29,44,739/- as capital expenditure.

69.1 According to above stated contract the assessee company has made payment for license user fees and maintenance fee every month after the deduction of TDS. Further, Assessee submitted that the above stated expenditure has been allowed as revenue expenditure by the Ld.CIT (A) in the AY 2001-02 and AY 2002-03.

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69.2 However, the AO disagreed with the contention of the assessee by observing that once the software developed for any company, its use/ benefits are derived from such software in the subsequent years as well.

69.3 The AO further observed that such expenditures are in the nature of capital expenditure. Therefore the assessee is entitled for the depreciation allowance. Accordingly the AO after relying on the order of his predecessor, treated the expense as capital in nature and allowed the depreciation at 60% amounting to Rs. 1,97,66,844/- and remaining amount of Rs. 1,31,77,895/- was added to the total income of the assessee .

Being aggrieved by the order of Ld.CIT (A) the assessee is in appeal before us.

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Relevant finding of the ITAT in ITA No. 793/AHD/2006

“21. We have heard the rival submissions and perused the material on record. The fact of incurring of expenditure for SAP on account of user licencee fee and on account of reimbursement is not in dispute. We find that Hon'ble Delhi High Court in case of CIT vs. Asahi India Safety Glass Ltd.

(2011) 64 DTR (Del) 63 has concluded that the expenditure incurred by assessee on software is allowable as Revenue expenditure more so as the expenditure acquired by the assessee was an application software which enable it execute tasks in the field of accounting, purchases and inventory maintenance. In case of IBM India Ltd. vs. ACIT (2007) 108 TTJ (Bang) 531 the Co-ordinate Bench of Tribunal has held that expenditure on purchase of application software is allowable as revenue expenditure as it is an aid in manufacturing process rather than the tool and though there is an enduring benefit there is no acquisition of capital asset. In case of GE Capital Services India Ltd. 106 TTJ 65 (Del), the Co-ordinate Bench has held that software I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G Bearings India L td . v s . D CI T) Page 12 being the filed of vast change technology which needs update and upgradation regularly, expenditure on software is allowable as Revenue expenditure. Before us, Revenue has not brought on record any contrary binding decision in its support. We, therefore following the aforesaid decisions, are of the view that the expenditure incurred by the assessee has to be allowed as revenue expenditure. We direct accordingly. Thus, this ground of assessee is allowed.”

Relevant finding of the ITAT in ITA No. 817/AHD/2006

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order of the Ld. CIT-A. Accordingly, we direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

The fourth issue raised by the Assessee in ground no. 4 is that the Ld.CIT (A) erred in confirming the order of the AO by sustaining the addition of the unutilized CENVAT Credit for Rs. 1,58,86,554/- in the valuation of closing stock.

74.1 On a question by the AO, the assessee submitted that it follows exclusive method of accounting. Accordingly the material purchased is debited to the P/L Account without including the element of CENVAT Credit though the same is part of the purchase value. The amount of CENVAT Credit is shown as current assets in balance sheet.

74.2 The assessee further submitted that the provisions of section 145A of the Act require following the inclusive method of accounting. Consequently, the stock should be inclusive of the CENVAT Credit. But this will be tax neutral exercise as held by the Hon’ble Apex court in the case of Nippon Oxo chemical Ltd reported in 261 ITR 275 that under both the method same profit is determined and accordingly a tax neutral method.

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74.3 The assessee further submitted that it has paid the amount of duty before the due date of furnishing the return of income as specified under section 139 of the Act. Therefore the amount of such duty will be allowed as deduction under section 43B of the Act.

74.4 However, the AO rejected the contention of the assessee by observing that it is mandatory to follow the provisions of section 145A of the Act.

74.5. Accordingly the AO added the unutilized CENVAT Credit for a sum of Rs. 1,58,86,554/- to the total income of the assessee.

75.1 The CIT (A) observed that assessee has not denied the applicability of the provisions of section 145A of the Act. Thus it is required to follow the inclusive method of accounting for CENVAT. Accordingly the Ld. CIT-A confirmed the order of the AO by observing that the CENVAT amount should be included in the value of closing stock but this year’s opening stock need not be disturbed. However, the Ld. CIT-A further directed to allow the deduction for the amount duty as per the provisions of section 43B of the Act. Thus the Ld. CIT-A partly allowed the ground of appeal of the assessee.

Being aggrieved by the order of Ld.CIT (A), the assessee is in appeal before us.

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79.1 From the preceding discussion, we note that the assessee has been recording its transactions of purchase, sales, and valuation of inventories, net of CENVAT consistently. Thus, if the inventory of closing stock is enhanced by the amount of CENVAT credit attributable to it, then the amount of corresponding purchases should also be increased by the said amount which will result in tax neutral exercise. Thus, in our considered view, the Assessing Officer erred in enhancing the value of closing stock without giving effect to the purchases. In this regard, we find support and guidance

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from the judgment of Hon’ble Gujarat High Court in the case of Pr.CIT vs. Gujarat Gas Company Ltd. In Tax Appeal No.90 of 2017 vide order dated 07/02/2017, wherein it was held as under:- “3.03. Now, so far as question No. [B] i.e. with respect to addition made by the A.O. on account of unutilized modvat/cenvat credit of Rs. 56,08,089/- is connected, it is required to be noted that the learned tribunal has taken note that with respect to modvat receivable account, there is corresponding less debit to the purchase account and hence to that extent there is already income offered for tax. If that be so, there was no question of further adding modvat/cenvat credit to the income of the assessee for the year under consideration. Under the circumstances, we see no reason to interfere with the impugned judgement and order passed by the learned tribunal so far as confirming the order passed by the learned CIT(A) deleting the addition made by the A.O. on account of unutilised modvat/cenvat credit of Rs. 56,08,089/-. We are in complete agreement with the view taken by the learned tribunal.”

79.2 There is no ambiguity that the assessee has been following the exclusive method of accounting. In view of the above, we reverse the order of the Ld.CIT (A) and accordingly direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.

The fifth issue raised by the assessee in ground no 5 is that the Ld.CIT (A) erred in fact and law confirming the adjustment to the income of appellant in respect of royalty amounting to RS. 98,42,600/- and in respect of other international transaction amount to RS. 81, 00,848/-

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The sixth issue raised by the Assessee in ground no 6 is that the Ld.CIT (A) erred in confirming the action of the AO to allocate certain expenses between EOU and DTA in ratio of turnover.

The seventh issue raised by the Assessee in ground no 7is that the Ld.CIT (A) erred in confirming the action of the AO to exclude certain income while calculating the deduction u/s 80HHC of the act.

The eighth issue raised by the assessee in ground no. 8 is that the Ld.CIT (A) erred in not adjudicating the additional ground raised before him to direct the AO to allow the depreciation in respect of the expenses treated as capital in nature.

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The issues raised by the assessee in ground Nos. 9 to 12 are general, consequential and premature. Therefore we dismiss the same.

In the result, appeal of the assessee partly allowed for statistical purposes.

Now coming to appeal of the Revenue bearing ITA no. 1529/Ahd/2009 for the AY 2005-06

The Revenue has raised the following grounds of appeal:

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entire organization comprising DTA Unit and tax free EOU unit and hence depreciation on all the assets used for office work and establishment work including these data processing machines had to be apportioned between the DTA Unit and the EOU Unit, as was done by the assessing officer. 5. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing the entire advertisement expenditure of Rs.21,18,782/- in the computation of income of the DTA Unit, without appreciating that the advertisement expenses helped to create brand affinity in the global market and promoted the sale of all categories of the assessee’s products, directly or through foreign group companies, thus requiring apportionment of these expenses in a reasonable manner between the DTA Unit and the EOU Unit, as was done by the assessing officer. 6. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding the payment of Rs.6,71,81,000/- to the associate concerns covered by section 40A(2)(b), in the name of fee for use of technical know how, for the manufacture of assessee’s products, as revenue expenditure, instead of capital expenditure treated by the assessing officer. 7. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.18,17,00,000/- u/s.92CA(3) without considering the material contained in the order of the Transfer Pricing Officer on merits. 8. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.

Relief claimed in appeal The order of the CIT(A) on the above issues may be set aside and that of the A.O. be restored.

The issue raised by the Revenue in ground no. 1 is that the Ld.CIT (A) erred in allowing the expenses of Rs. 76,44,127/- in respect of monthly operating charges of software as revenue expenses instead of capital expenses.

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The issue raised by the Revenue in ground no 2 is that the Ld.CIT (A) erred in allowing the deduction amounting to Rs 1,55,86,554/- of unutilized CENVAT credit u/s 43B of the Act.

The issue raised by the Revenue in ground no 3 is that the Ld.CIT (A) erred in deleting the addition made by the AO for Rs. 5,78,912/- u/s 40A(9) of the Act, on account of training cost of employees.

The issue raised by the Revenue in ground No. 4 and 5 is that the Ld.CIT (A) erred in deletion the addition made by the assessee on account of the allocation of depreciation on data processing machine and advertisement expenses Rs. 5,68,979.00 and Rs. 21,18,782.00 to the EOU unit.

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relevant Para therein, we direct accordingly. Hence Ground no. 4 and 5 of the Revenue is dismissed.

The issue raised in ground no. 6 is that Ld. CIT-A erred in deleting the addition made by the AO for Rs. 6,71,81000.00 by treating the fees for technical knowhow as capital expenditure.

The issue raised in ground no. 7 is that Ld. CIT-A erred in deleting the addition made by the AO/TPO for Rs. 18,17,00,000.00 on account of upward adjustment in DTA Unit.

In the result, the appeal of the Revenue is dismissed

Now coming to appeal of the Assessee bearing ITA no. 1588/Ahd/2009 for the AY 2005-06

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The assessee has raised the following grounds of appeal:

All the grounds of appeal are mutually exclusive and without prejudice to each other. 1. The learned CIT(A) erred in fact and in law in confirming the action of the AO in disallowing R&D expenses of Rs.58,59,987/- claimed u/s 35(1) of the income Tax Act, 1961 despite the fact that appellant had furnished complete details for substantiating the claim. 2. The learned CIT(A) erred in fact and in law in confirming the action of the AO in disallowing SAP R/3 charges amounting to Rs.2,08,32,699/- on the ground that the said expenses are capital expenditure. 3. The learned CIT(A) erred in fact and in law in confirming the action of the AO in allocating the following expenses between DTA unit and EOU in the ratio of their respective turnover and reworking deduction claimed u/s.10B of the Act despite the fact that Appellant had made detail submission with respect to allocation made by it and it was requested that no further adjustment is required to be made. Particulars Total Amount Allocated to DTA Allocated to (Rs.) (Rs.) EOU (Rs.) Depreciation on Motor 14,75,904 13,08,046 1,67,853 Car Depreciation on Software 1,70,86,096 1,51,42,859 19,43,237 Upgradation/Development of Addl.Programme of SAP R/3 treated as capital expenditure Total…. 1,85,62,000 1,64,50,905 21,11,090

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The issue raised by the assessee in ground no. 1 is that the Ld.CIT (A) erred in disallowing the R & D expenses amounting to Rs. 58,59,987/- claimed u/s 35(1) of the Act.

The issue raised by the assessee in ground no 2 is that the Ld.CIT (A) erred in disallowing the up-gradation charges of SAP R3 software amounting to Rs. 2,08,32,699/- by treating it as capital expenses instead of Revenue expenses.

The issue raised by the assessee in ground no. 3 is that the Ld.CIT (A) erred in confirming the allocation of certain expense i.e. Depreciation on Motor Car of Rs. 1,67,853.00 & SAP R/3 of Rs. 19,43,237.00 made by the AO to the EOU unit.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 86

The issue raised by the assessee in ground no. 4 is that the Ld.CIT (A) erred in treating the repair & maintenance expenses amounting to Rs. 3,00,745/- as capital expenditure.

“9.2. I have considered the submissions of the ld.AR and the facts of the case. The details of the impugned expenses have been tabulated by the AO at page 14 of the assessment order. On examination of the same it is seen that the expenses involved replacement of parts like filter, driver, pressure regulator, air meter, etc. These are clearly items of replacement of worn out parts. However it is seen that the expenditure also included purchase of computer (Rs.2,30,557/-) and software development charges (Rs.26,448/- and Rs.43,740/-). These are capital in nature since new software has been developed and new computer has been purchased. Accordingly, the disallowance is

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 87

confirmed to the extent of Rs.3,00,745/- and the balance of Rs.32,61,118/- is directed to be deleted. However, the AO is directed to allow depreciation on computer and software at the prescribed rate.”

Being aggrieved by the order of the Ld.CIT (A), the assessee is in appeal before us.

The issue raised by the assessee in ground no. 5 is that the Ld.CIT erred in confirming the addition made by the AO/TPO amounting to Rs. 485.41 lacs on account of payment of Royalty to extent of 1.5% of sales.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 88

the relevant Para therein, we direct accordingly. Hence, Ground no. 5 of the Assessee is allowed for the statistical purposes.

In the result, the appeal of the assessee is partly allowed for statistical purposes.

Now coming to the assessee’s appeal bearing ITA No. 1453/AHD/2011 for the AY 2005-06 against the order passed under section 263 of the Act.

The assessee has raised the following grounds of appeal:

The only issue raised by the assessee is that Ld. CIT erred in holding that the order passes by the AO u/s 143(3) of the Act, is erroneous and prejudicial to the interest of Revenue.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 89

60%. Thus allowed depreciation of Rs. 1,70,86,096/- and remaining balance of Rs. 1,13,90,730/- disallowed and added to the income of the assessee.

100.1 The Ld.CIT (A) by following the earlier judgment for AY 2002-03 confirmed the addition to the extent of Rs, 2,08,32,699/- vide order dated 27- 03-2009, treating it as a capital expenditure for the purpose of acquiring the intangible assets i.e right to use and exploit a particular software program. As such the addition confirmed was considered the capital expenditure for intangible assets, therefore the depreciation @ 25% only should be allowable instead of 60%. Therefore excess depreciation allowed by the AO in order u/s 143(3) of the act dated 26-12-2008. Thus the order of the AO was considered to be erroneous and prejudicial to the interest of revenue.

100.2 On question by the Ld.CIT the assessee submitted that the SAP- R3 cost is expenditure on computer software which is part of block of computer. Computer is covered in old appendix I under the income tax rule 1962 the applicable rate on computer is 60% not 25%.

100.3 Further, assessee submitted that in the assessee own case for pertaining AY 2006-07 the Hon’ble DRP decide the issue in favor of assessee as the monthly payment of license is recurring expenditure and regarding cost of customization, changes are made as per requirement of the business. The assessee has license to use the software ownership lies with the SAP. Software installed only tool to carry on the business. There is no advantage in capital filed.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 90

100.4 However, the Ld. CIT after considering the submission made by the assessee find out that the case of the assessee pertaining to AY 2002-03 pending before the ITAT and hearing of appeal of such case fixed on 19-04- 2011 but the 263 time barred after 31-03-2011. Further the decision of DRP cannot be treated as conclusive for AY 2005-06. Therefore the Ld.CIT directed to the AO allow depreciation @-25% instead of 60%.

Being aggrieved by the order of the Ld.CIT the assessee is appeal before us.

“21. We have heard the rival submissions and perused the material on record. The fact of incurring of expenditure for SAP on account of user licencee fee and on account of reimbursement is not in dispute. We find that Hon'ble Delhi High Court in case of CIT vs. Asahi India Safety Glass Ltd. (2011) 64 DTR (Del) 63 has concluded that the expenditure incurred by assessee on software is allowable as Revenue expenditure more so as the expenditure acquired by the assessee was an application software which enable it execute tasks in the field of accounting, purchases and inventory maintenance. In case of IBM India Ltd. vs. ACIT (2007)

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108 TTJ (Bang) 531 the Co-ordinate Bench of Tribunal has held that expenditure on purchase of application software is allowable as revenue expenditure as it is an aid in manufacturing process rather than the tool and though there is an enduring benefit there is no acquisition of capital asset. In case of GE Capital Services India Ltd. 106 TTJ 65 (Del), the Co-ordinate Bench has held that software I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 12 being the filed of vast change technology which needs update and upgradation regularly, expenditure on software is allowable as Revenue expenditure. Before us, Revenue has not brought on record any contrary binding decision in its support. We, therefore following the aforesaid decisions, are of the view that the expenditure incurred by the assessee has to be allowed as revenue expenditure. We direct accordingly. Thus, this ground of assessee is allowed.”

103.1 In view of above, we hold that the issue for rate of the depreciation does not arise as the SAP R/3 expenses has been treated as Revenue Expenditure by the ITAT as discussed above. Thus, the order passed by the ld. CIT under section 263 of the Act does not require any adjudication as the same is no longer valid. Hence, the ground of the appeal of the assessee is allowed.

In the result, the appeal of the assessee is allowed.

The issue raised by the assessee in ground no. 1 is that the Ld.DRP erred in making the following adjustment: 1. Making upward adjustment of RS. 339.24 2. Segregation of transaction in applying ALP 3. Rejection of TNMM and application of CUP 4. Alteration in comparable

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 92

S.No. AE Name Nature of Transaction Value of Transaction 1. Schaeffler KG, i) Purchase of Raw materials 21,35,17,272 Germany ii) Import of Bearing for Resale iii) Fees for Technical Service 102,74,21,280 iv) Testing charge 2,48,88,415 v) Charges paid for I.T.Project 3,44,392 vi) Reimbursement of expenses 1,71,04,984 64,06,377

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 93

S.A. material 13 FAG Kugelfisher AG i) Fees for & Co. HG), Germany Technical 6,68,96,100 services ii) Fees for 2,96,66,569 consultancy services 14) Shanghai Asia i)Fee for Management services 14,03,715 Management ii)Reimbursement of expenses (Shanghai) Co.Ltd. 3,43,211

104.1 The assessee to determine the ALP of the above transactions has applied the following steps as detailed under: • selected itself as tested party • used TNMM as most appropriate method • PLI took as profit before tax or OPM to net sales. • Used multiple years data of comparable companies to determine the ALP

104.2 Accordingly, the assessee computed the PLI of its manufacturing segment as 18.76% and PLI of its distribution segment as 8.99% as detailed under:

Sl.No. Type of Transactions Aggregated PBT (NOI, NNRT) to sales under Appellant Comparable Company Company 1. Export of Finished Goods

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104.3 The assessee selected 5 comparables for its manufacturing segment and determined the PLI of such comparables as 12.35% which is lesser from the PLI of the assessee i.e. 18.76%

104.4 Further, assessee selected 20 comparables for its distribution segment and determined the PLI of such comparable as 1.13% which is lesser from the PLI of the assessee i.e. 8.99%

104.5 The TPO after considering the TP study submitted by the assessee objected the multiple year data used by the assessee

104.6 Further, TPO observed that the assessee during the year under consideration has paid Royalty of Rs. 990.34 lacs to FAG Kugle Fischer, Germany 104.7 The royalty has been paid on the basis of agreement as detailed under:

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Sr.No. Reference of Agreement Effective date Rate of Royalty 1st June 2000 upto 31st 1. Agreement dated 12st 3% on scheduled December 2000 may-2005 products and 5% on Non-scheduled products. Agreement dated 12t5h 1-06-2005 September 2005

16th Agreement dated 1-1-2006 February 2006 This agreement was executed in view of merger of collaborator. The rates of royalty have remained same. Agreement dated 24th June 5th February 2002 2. 5% on domestic sale 2002 and 8% on export sales. Agreement dated 30th March- 9th May 2001 5% of sales. 3. 2000

104.8 The rate of royalty has been fixed on the basis of classification of product as detailed under: Classification of product Rate of Royalty Schedule product 3% Non Schedule product 5% Export sales from EOU 8% 104.9 Totally royalty paid by the assessee on sales as detailed under:

Sl.No. Gross Sales Rate of Royalty Royalty 1. 302259.06 3% 702.47 2. 4190.96 5% 172.58 3 1660.11 8% 115.,29 Total 36110.13

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 96

104.10 However, the assessee was paying Royalty at the rate 1.5% on all products till 2000.

104.11 The assessee also submitted the TP report prepared for Scheffer Group for automotive components where 11 transaction (agreement) available for comparable as external CUP.

104.12 The TPO on verification of Scheffer group study found that some agreement bearing no 10407, 5511, and 8450 are not acceptable. Accordingly the TPO issue SCN to the assessee to explain the same. The assessee has submitted regarding the use of multiple year data as under: 1) Data for FY 2005-06 of comparable are not available on database at the time of TP study 2) According to rule 10B(4) and also as per OECD guidelines data of two earlier years can be used.

104.13 The assessee also objected the rejection of TNMM method by TPO by submitting that the assessee aggregated all transaction in term of purchase of material, sale of goods, provision of services, receipt of services etc that entered with its AE. As such all these transactions are interlinked including the Royalty paid to its AE. Segregation of these transactions is not possible and where the segregation is not possible as per the OECD guidelines TNMM method should be applied to determine ALP.

104.14 Regarding the application of CUP method the assessee has submitted that the Rate of Royalty paid by the other group companies should be taken as CUP. Assessee also submitted that it has paid Royalty on net sales

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after and therefore the comparables should also be compared on the basis of net sales.

104.15 Further assessee also objected the rejection of three agreements from the 11 agreements submitted by the assessee in Scheffer Group study. However the TPO rejected the contention of assessee, use of multiple year data by observing as under: • As per Rule 10B of the Income Tax Rule for the benchmarking of an International transaction data of comparables should be used the data for the year in which transactions have took place. • As per the OECD guidelines the multiple year data is considered to be used under special circumstance.

104.16 In view of above, the data for the year 2003-04 and 2004-5 used by the assessee for determining the ALP of the international transaction is rejected.

104.17 The TPO reject the TNMM method used by the assessee for determining the ALP by observing as under: • The assessee not submitted any evidence to prove that the transactions which are aggregated by it are inter-linked and not possible to segregate it. • The assessee has paid royalty on the basis of agreement but no clause in all these agreement related to purchase of material, sale of goods, provisions of services. • Further as per the OECD guidelines the transaction which are not possible to segregate are in the nature of composite agreement and

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 98

packaged deal. No such type of agreement and deal is present in the case of the assessee.

104.18 The TPO also rejected the contention of the assessee for using the rate of royalty paid by the other AE by observing that these transactions are related party transaction. Therefore the same cannot be considered as internal/external CUP.

104.19 The TPO rejected the three agreements out of 11 agreements submitted by the assessee as comparable for the application of CUP method by observing as under: • Agreement no 10407:- On verification of the agreement it is found by the TPO that this agreement is composite agreement for patent, trade mark, and certain trade secrets and not for the technical know-how. Therefore this agreement is not considered as appropriate comparables. • Agreement no 5511:- On verification of the agreement it is found by the TPO that in this agreement in entry no 2 the Royalty rate appear as 50% and in absence of complete agreement no reason found for such higher Royalty rate. Further noticed from the agreement that the product mentioned in the agreement is video vehicle detection system is an electronic equipment, thus the same cannot be considered as automotive-the product of the assessee. Therefore this agreement is not considered as appropriate comparables. • Agreement no 8450:- This agreement is also a composite agreement. Therefore the same is rejected.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 99

104.20 In view of the above, the TPO considered remaining 8 agreements as external CUP and determined the average rate of Royalty as 2.26%. Accordingly, the TPO computed the ALP and made upward adjustment of Rs. 3,50,56,457/- on account of the Royalty payment by detailing as under:

Rate of Royalty Total Royalty Adjusted Royalty @ 2.26% 3% 702.47 529.19 5% 172.58 78.006 8% 115.29 32.6742 990.33 639.765

The aggrieved assessee preferred an appeal to the Ld. DRP against the above draft order.

Regarding segregation/aggregation of International transaction:

105.1 TPO admitted the TNMM method used by the assessee to all transaction other than the Royalty. The TPO segregated only Royalty transaction. The aggregation of all other transactions under the manufacturing segment was accepted by the TPO. Thus the action of the TPO is contradictory.

Regarding the selection of most appropriate method:

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105.2 The TPO has not recorded the reason for applying the CUP method as most appropriate method. Therefore there was no reason for rejecting the TNMM method as the most appropriate method.

Regarding the alteration of comparable set:

105.3 No valid reason given by the TPO to reject the three agreements out of eleven agreements. If the criteria’s selected by the TPO for rejection of the agreement is considered, then the other agreements bearing nos. 3998, 4082, and 4102 should also be rejected. However the TPO did not reject the same by reason of Royalty rate in these agreement are very low. In case the above agreements are rejected, then the average rate of royalty of remaining 5 comparables would be 3.20% only.

105.4 The company has paid royalty at the rate of 2.74% of total sales which is lower than the comparables rate. Thus the transaction should be treated as arm’s length.

105.5 However, the Ld. DRP rejected the contention of the assessee regarding the aggregation of the transactions to determine the ALP by placing the reliance on the ITAT judgment in case of UCB India (P) Ltd Vs ACIT reported in 121 ITD 131 wherein ITAT held that the international transaction has to be evaluated on a standalone basis. In view of the above the Ld. DRP rejected the aggregation of the transaction done by the assessee.

105.6 Further, the Ld. DRP also observed that the TPO during the assessment proceeding for AY 2007-08 computed the average rate of the

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 101

Royalty as 2.3% on the basis of 5 agreements out of 11 agreements. Accordingly the Ld. DRP confirmed the addition of Rs. 339.24 lacs out of 350.56 lacs.

105.7 The Ld. DRP also reject the benefit of adjustment of +,-, 5% by placing the reliance on the ITAT order in case of Global Vantedge (p) Ltd. Vs. DCIT reported in 1 ITR 326.

Being aggrieved by the order of the Ld. DRP the assessee is in appeal before us.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 102

108.1 As such the identical issue has been considered and decided by us in Revenue's appeal vide ITA No. 4565/AHD/2007 in ground no. 3 vide Para no 16 of this order which we have set aside to the ld. CIT-A for fresh adjudication as per the provision of law. Thus the ground of appeal of the Revenue was allowed for statistical purposes. Please refer the relevant Para for our detailed discussion therein, we direct accordingly. Hence Ground no. 1 of the assessee is allowed for statistical purposes.

The second issue raised by the assessee is that the Ld. DRP erred in treating the running cost of SAP R/3 charges and up-gradation cost for Rs. 61,87,000.00 and 1,71,05,000.00 as capital expenditure and accordingly disallowed the same:

The third issue raised by the assessee is that the Ld. DRP erred in treating the royalty expenses of Rs. 790.52 lacs as capital expenditure as well as not allowing depreciation on such expenses.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 103

Para therein, we direct accordingly. Hence Ground no. 3 of the appeal of the assessee is allowed.

The issue raised by the assessee in ground no. 4 is that the Ld.DRP erred in confirming the allocation of certain expense i.e. Depreciation on Motor Car of Rs. 1,29,619.00 & SAP R/3 of Rs. 7,86,915.00 made by the AO to the EOU unit.

The assessee in ground no. 5 & 6 is seeking the direction to allow the depreciation in respect of the expenditure treated as Revenue in the AY 2001- 02 to 2005-06.

In the Result, the appeal of the assessee partly allowed for statistical purposes.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 104

ITA NO 1197/AHD/2012 for AY 2007-08

The assessee has raised the following grounds of appeal:

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The first issue raised by the assessee is that the ld. CIT-A erred in making the following adjustments: 1. Making upward adjustment of RS. 3,11,98,000.00 on account of royalty payment. 2. Reimbursement of Insurance Expenses of Rs. 74,09,925.00

Making upward adjustment of Rs. 3,11,98,000 on account of royalty payment.

Coming to the issue of Reimbursement of Insurance Expenses 115. The TPO on verification of form 3CEB found that the assessee has shown reimbursement of insurance premium of Rs. 74,09,925/- to its AE. The assessee regarding its claim submitted that the insurance policy was taken by the AE for entire Schaeffler group and allocated to entire premium to each of the group company. The assessee has made payment to amount allocated to him.

115.1 However, the TPO disregard the contention of the assessee by observing that the as per Indian Insurance Act the Indian companies cannot make payment to foreign insure to take insurance policy from foreign

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 106

insurer. Accordingly the Ld. TPO computed the ALP of the reimbursement of insurance premium at NIL. Therefore the TPO made upward adjustment for Rs. 74,09,925/-. Accordingly the AO made an addition on the basis of order u/s 92CA(3) of the Act to the total income of the assessee.

“2.2.3. Part of Ground No.1.1 of appeal in respect of transfer pricing adjustment of Rs.74,09,925/- towards reimbursement of foreign insurance premium and Ground No.16 of appeal regarding the same issue are taken up now. There is no dispute that under the Indian Regulations (IRDA/RBI), Indian companies can neither make nor remit insurance premium to foreign insurance company. In fact, as admitted by the appellant, RBI has not allowed remittance of insurance premium in question by the appellant to its AEs. In a third party situation, no company could have been such insurance from the foreign insurer and there is no question of payment of similar insurance premium payment between independent parties, i.e. an Indian company to an insurer abroad. The ALP of the transaction was therefore, rightly determined at Rs.NIL by the TPO through CUP method though not expressly mentioned in TPO’s order. Without prejudice, claim of expense of such insurance premium is not allowable in view of Explanation below section 37(1) of the Act as well. Grounds of appeal in respect of transfer pricing adjustment for insurance premium of Rs.74,09,925/- are dismissed.”

Being aggrieved by the order of the Ld.CIT (A) the assessee is in appeal before us.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 107

The second issue raised by the assessee is that ld. CIT-A erred in confirming the order of the AO by treating the SAP R/3 up-gradation expenses for Rs. 50,53,000.00 as capital in nature.

The 3rd issue raised by the assessee is that the Ld.CIT (A) erred in confirming the order of the AO by treating the repairs to the building for Rs. 48,23,252.00 as capital expenditure.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 108

In the result, the appeal of the assessee is partly allowed for statistical purposes.

Coming to Revenue’s appeal bearing ITA No. 1256/AHD/2012

The Revenue has raised the following grounds of appeal:

“1. On the facts and in the circumstances of the case and in law, the ld.CIT(Appeals) erred in restricting the upward adjustment from Rs 426.64 lacs to Rs.311.98 lacs without considering the merits of the reasons given by the TPO for the upward adjustment of royalty @ 2.3% by considering the 5 license agreements.

The first issue raised by the Revenue is that the Ld. CIT-A erred in reducing the addition to Rs. 1,14,66,000.00 from 4,26,64,000.00 Rs. on account of upward adjustment made by the TPO for the royalty expenses.

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The 2nd issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 56,70,732.00 treating the repairs of machinery expenses as capital in nature.

124.1 On question by the AO, the assessee submitted that all the aforesaid expenses are representing the normal wear and tear expenses. Therefore the same cannot be treated as capital in nature.

124.2 However, the AO disagreed with the contention of the assessee and held that the expenses amounting to Rs. 56,70,732.00 represents the purchases of the new assets. Accordingly the AO treated these expenses as

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capital in nature. Hence the AO disallowed the claim of the assessee for Rs. 56,70,732/- and added to the total income of the assessee.

“5.2.1. Regarding expenditure claimed to be towards repairs of machinery, appellant’s submission is that none of the items replaced were capable of working independently and the items were replaced due to normal wear and tear. As per the parameters laid down in the case of Saravana Spinning Mills, expenditure of Rs.56,70,732/- is directed to be allowed as revenue expenditure. Ground No.5 of appeal is allowed and Ground No.5.1 opf appeal having become infructuous is dismissed.”

Being aggrieved by the order of the Ld.CIT (A), the Revenue is in appeal before us.

In the result, the appeal of the Revenue is dismissed.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 111

Coming to Revenue’s appeal in ITA No. 1941/AHD/2012

The Revenue has raised the following grounds of appeal:

The only issue raised by the Revenue is that the Ld. CIT-A erred in reducing the addition to Rs. 1,08,09,000.00 from 5,02,33,000.00 Rs. on account of adjustment made by the TPO for the royalty expenses.

In the result the appeal of the Revenue is dismissed.

ITA No. 2061 FAG Bearing Ltd.

The assessee has raised the following grounds of appeals:

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All the grounds of appeal in this appeal are mutually exclusive and without prejudice to each other. 1. Transfer Pricing Adjustment 1.1. The learned CIT(A) erred in fact and in law in confirming the action of Transfer Pricing Officer-I, Ahmedabad (“the TPO”) in proposing and the learned Deputy Commissioner of Income Tax, Circle 1(2), Baroda (“the AO”) in making adjustment of Rs.394.24 lacs in determination of Arm’s Length Price (“ALP”) of International transaction in respect of payment for Royalty and reimbursement of Insurance Charges. 1.2. The learned CIT(A) erred in fact and in law in confirming the action of the TPO and the Assessing Officer in applying the Arm’s Length Principle on segregated transactions. 1.3. The learned CIT(A) erred in fact and in law in confirming the action of the TPO and the AO in applying CUP method as the most appropriate method rejecting the TNMM as selected by the Appellant for determining the ALP of payment of Royalty. 1.4. The learned CIT(A) erred in fact and in law in confirming the action of the TPO in comparing the average rate of royalty in case of comparable with the individual rates of royalty as per agreement entered in to by the assessee for determining ALP. The TPO ought to have compared the average rate of comparables with the average rate of royalty paid by the assessee on its gross turnover. 1.5. The learned CIT(A) erred in fact and in law in confirming the action of the TPO and the AO in not allowing the variation of +/- 5% of international transactions as required by proviso to section 92C(2) of the Act. 1.6. The learned CIT(A) erred in fact and in law in confirming the action of the TPO and the AO in determining the ALP of the transaction of Reimbursement of Insurance charges without applying any of the method prescribed under section 92C(1) of the Act. 2. The learned CIT(A) erred in fact and in law in confirming the action of the AO in making a disallowance of Rs.6.22 lacs [gross value of expenditure] being SAP R/3 cost on the ground that the said expenses are upgradation charges and are capital in nature. 3. The learned CIT(A) erred in fact and in law in confirming the action of the AO in treating expenses of Rs.8,34,893/- being repair to building as capital expenditure instead of revenue expenditure. 4. The learned CIT(A) erred in fact and in law in confirming the action of the AO in charging interest u/s.234D and of the Income Tax Act, 1961. 5. The learned CIT(A) erred in fact and in law in confirming the action of the Assessing Officer in initiating penalty proceedings u/s.271(1(c) of the Income Tax Act, 1961.

The first issue raised by the assessee is that the ld. CIT-A erred in making the following adjustments:

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 113

Making upward adjustment of RS. 3,94,42,000.00 on account of royalty payment.

Coming to the issue of Reimbursement of Insurance Expenses of Rs. 92,63,039.00

129.1 At the outset, we note that the identical issue regarding the adjustment of the Insurance expenses of Rs. 92,63,039.00 has been decided by us in ITA 1197/Ahd/2012 vide Para no. 119 of this order wherein we have dismissed the ground of appeal of the assessee. Respectfully following the same we dismiss the impugned ground raised by the assessee.

The second issue raised by the assessee is that Ld. CIT-A erred in confirming the order of the AO by treating the SAP R/3 up-gradation expenses for Rs. 6,22,00,000.00 as capital in nature.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 114

The issue raised by the assessee in ground No. 3 is that the Ld. CIT-A erred in treating the repairs to the building expenses as capital in nature amounting to Rs. 8,34,893 only.

The issue raised by the assessee in ground no. 4 to 6 is in general, consequential and premature. Therefore we dismiss the same.

In the result, the appeal of the assessee is partly allowed for the statistical purposes.

Coming to Revenue’s appeal in ITA No. 551/AHD/2016

The Revenue has raised the following grounds of appeal:

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 115

Relief claimed in appeal

It is prayed that the order of the CIT(Appeals) be set aside and that of the Assessing Officer be restored.

The only effective issue raised by the Revenue is that the ld. CIT-A erred in deleting the addition of Rs. 2,60,77,400.00 on account of adjustment made by the TPO for the royalty expenses.

Note : we find that the Revenue in its ground of appeal has agitated the issue of the Insurance expenses claimed by the assessee, though there was no

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 116

prejudice to the Revenue as the ld. CIT-A decided the issue in favour of the assessee. Therefore we treat the ground of appeal of the Revenue qua the Insurance expenses as infructuous. Accordingly we dismiss the same.

In the result, the appeal the Revenue is partly allowed for statistical purposes.

Coming to Assessee’s appeal in ITA No. 798/AHD/2016

The assessee has raised the following grounds of appeal:

All the grounds of appeal in this appeal are mutually exclusive and without prejudice to each other. 1. The learned Commissioner of Income Tax-1, Baroda [“the CIT”] erred in fact and in law in revising the assessment by invoking powers u/s.263 of the Income Tax Act, 1961 (“the Act”) despite the fact that the conditions stipulated for invoking such extra- ordinary jurisdiction were not satisfied. 2. The learned CIT and in fact and in law in not appreciating the fact that the assessment u/s.143(3) was completed after calling for various details and after examining the accounting polities followed by the Appellant for determining the total income. 3. The learned CIT erred in fact and in law in revising the assessment despite the fact that the issue on which the notice u/s.263 was issued was examined by the Assistant Commissioner of Income tax Circle-1(2), Baroda {“the AO"] during the course of regular assessment. 4. The learned CIT erred in fact and in law in passing the order u/s.263 without giving any finding as to how the order passed by the AO u/s.143(3) is erroneous and prejudicial to the interest of the revenue. 5. The learned CIT erred in fact and in law in holding that section 145A is applicable and directing the AO to make a fresh assessment. 6. Your Appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 117

133.1 Therefore, we are not inclined to condone the delay in the absence of any reason which prevented the assessee in filing the appeal. Hence we dismiss the appeal of the assessee.

Coming to Assessee’s appeal in ITA No. 799/AHD/2016

The assessee has raised the following grounds of appeal:

All the grounds of appeal in this appeal are mutually exclusive and without prejudice to each other.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 118

The only issue raised by the assessee is that the learned CIT (A) erred in confirming the order of the AO by sustaining the addition of Rs. 5, 92,16,449/- on account of CENVAT Credit attributable to the closing stock.

134.1 An identical issue has been considered and decided by us in assessee's appeal vide ITA No. 80/Ahd/2008 in the ground no. 4 Para no. 79 of this order in favor of the assessee. For a detailed discussion, please refer the relevant Para, we direct accordingly. Hence Ground of the appeal of the assessee is allowed.

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 119

Order pronounced in the Court on 30/04/2019 at Ahmedabad.

Sd/- Sd/- (MS MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 30/04/2019 Manish/tc nair

ITA No.4565/Ahd/2007 and 4 Other appeals(By Revenue) & 80/Ahd/2008 and 7 Other appeals (By Assessee ) Asstt. Yeasr 2004-05, 05-06, 06-07, 07-08, 08-09, 09-10 120

आदेश क� ��त�ल�प �े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-concerned 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file.

आदेशानुसार/BY ORDER,

//True Copy//

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation .. 25.3.19(word processed by Hon’ble AM in his computer by dragon) 2. Date on which the typed draft is placed before the Dictating Member … 24.4.19 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S…………….. 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….30.4.2019 7. Date on which the file goes to the Bench Clerk…………………30.4.2019 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order………………