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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI B. R. BASKARAN
Assessee by : Shri. Ajit Tolani/Darpan Kirpalani, CA Revenue by : Shri. Roumuan Paite, CIT(DR)(ITAT), Bengaluru. Date of hearing : 16.03.2022 Date of Pronouncement : 21.03.2022 O R D E R Per N V Vasudevan, Vice President IT(TP)A No.355/Bang/2016 is an appeal by the assessee against the final Order of Assessment dated 28.12.2015 passed by the DCIT, Circle – 4(1)(1), Bengaluru, under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter called ‘the Act’), in relation to Assessment Year 2011-12. IT(TP)A No.2127/Bang/2016 is also by the assessee against the IT(TP)A Nos.355, 2127/Bang/2016 Page 2 of 21 final Order of Assessment dated 29.09.2016 passed under section 143(3) r.w.s. 144C Act, by DCIT, Circle-7(1)(1), Bengaluru, in relation to Assessment Year 2012-13.
Both these appeals involve identical issues and were heard together. We deem it convenient to pass a common order.
IT(TP)A No.355/Bang/2016 : As far as this appeal for Assessment Year 2011-12 is concerned, the grounds that were pressed for adjudication at the time of hearing were ground Nos.7 to 9 and additional ground No.15 and additional ground on education cess. This additional ground on education cess has been wrongly numbered as ground No.15. Ground Nos.7 to 9 and additional ground No.15 and additional ground on education cess read as follows: 7. The Learned AO / Learned Panel erred in considering Operating Profit ("OP")/Total Cost ("TC") as the Profit Level Indicator ("PLI") instead of OP/Sales without providing any reason for rejecting the PLI used by the Assessee in the TP Documentation, which is incorrect since the controlled transaction is purchase of raw material in the auto manufacturing segment and textile machinery manufacturing segment. Textile Machinery Manufacturing Segment 8. The Learned Panel / Learned AO has erred in considering Hindoostan Mills Ltd. ("Hindoostan") as a comparable company with respect to the textile division segment, in spite of the fact that Hindoostan is a functionally dissimilar company.
The Learned Panel has erred in its direction to the Learned AO to verify margin computation of Lakshmi Machine Works Ltd. ("LMW") and Veejay Lakshmi Engineering Works Ltd. ("Veejay") wherein the Appellant's contention was on the erroneous margin computation of LMW and Hindoostan.
IT(TP)A Nos.355, 2127/Bang/2016 Page 3 of 21 Auto Components Manufacturing Segment 15. That gross profit ("GP")/ Sales ought to be considered as the appropriate profit level indicator with respect to the auto components manufacturing segment, in accordance to the order of the Hon'ble ITAT in the Appellant's own case for AY 2010-11, as the facts and circumstances of the Appellant remain the same.
On the facts and in the circumstances of the case and in law, the Deputy Commissioner of Income-tax, Circle 4(1)(1), Bangalore (‘Learned AO’) / Hon'ble Dispute Resolution Panel (`lIon'ble DRP) erred in not allowing deduction under the provisions of the Income Tax Act, 1961, on account of Education Cess and Secondary and Higher Education Cess paid by the Appellant on the assessed income alongwith income-tax and surcharge for the year under appeal. It is prayed that the deduction of Education Cess and Secondary and Higher Education Cess should be allowed to the Appellant as business expenditure under the provisions of the Act.
Besides the aforesaid grounds which are in relation to determination of ALP in respect of an international transaction, the assessee has raised corporate grounds also and these grounds read as follows:
Other than Transfer Pricing 11. On the facts and in the circumstances of the case and in law, the Learned Panel erred in confirming the action of the Learned AO in disallowance of provision for gratuity of Rs 4,780,000, provision for long service award amounting to Rs 522,921 and provision for bonus amounting to Rs 4,187,434 by treating the same as unascertained liability, while computing the 'book profits' under section 115JB of the Act 12. On the facts and in the circumstances of the case and in law, the Learned Panel erred in not considering the submissions made by the Appellant and erroneously concluding that the Appellant itself has considered the above mentioned provisions as an unascertained liability.
IT(TP)A Nos.355, 2127/Bang/2016 Page 4 of 21 13. Without prejudice to above, the Learned AO/Learned Panel has erred in not allowing the deduction for long service award paid of Rs. 140,000 and bonus paid amounting to Rs. 3,051,641, while computing the 'book profits' under section 115JB of the Act.
That the Learned AO /Learned Panel erred in levying interest under section 234B amounting to Rs. 9,987,318.
5. As far as the grounds relating to determination of ALP of an international transaction is concerned, the facts are that the assessee is a joint venture between Toyota Industries Corporation, Japan holding 95% stake and the balance 5% is held by Kirloskar Systems Ltd., India. The assessee is engaged in the import of raw material and components from the AE for manufacture of textile machinery and auto components. In this appeal, we are concerned with the determination of ALP in the textile machinery segment. As far as manufacture of auto components is concerned, pursuant to the order of the DRP, the only relief which assessee seeks is with regard to computation of Profit Level Indicator (PLI) as done by the TPO which was operating profit on total cost. The assessee seeks PLI to be operating profit on sales. This prayer is also made in the textile machinery manufacturing segment. No other grounds were pressed in so far as auto components manufacturing segment is concerned. The grievance projected in this regard is found in ground Nos.7 and 15 which we have extracted in the earlier part of this order.
As far as prayer of the assessee for adopting PLI as OP/Sales, we find that this Tribunal in assessee’s own case for Assessment Year 2010-11 in IT(TP)A No.485/Bang/2015, order dated 18.05.2016, accepted the plea of the assessee and directed that the PLI should be adopted as OP/Sales. The following were the relevant observations of the Tribunal in this regard: “5.5.In principle, we ate in agreement with the contentions raised by assessee, as GP over sales can eliminate the difference in claim of depreciation due to age of machinery, rate at which it IT(TP)A Nos.355, 2127/Bang/2016 Page 5 of 21 was claimed and method of claims like straight line or written down value. We accordingly direct the AO/TPO to adopt the comparison of profitability ratios adopting GP over sales. Since the details of capacity utilization of the comparable companies and rate of depreciation could not be analysed as commented by DRP, it would be better if GP analysis was undertaken taking sales less cost of raw material as basis (excluding other cost including Depreciation, interest etc) so that auto components profitability could be analysed so as to consider whether the import of raw material from AE has effected the profitability of assessee under their provisions. Accordingly, we set aside the impugned orders of the Revenue 'authorities on this issue and restore the matter to the file of AO/TPO to carry out the exercise as stated above. Assessee should be given due opportunity. However, we make it clear that if any adjustment is required to be made, the same is to be restricted, as directed by DRP in pars 3.1.3 (Ground No.2) above. The matters which have attained finality are not intended to be reopened. AO/TPO is directed accordingly. Ground No. 3 is allowed for statistical purposes.”
Following the aforesaid decision, we hold that the PLI should be adopted for the purpose of comparing assessee’s margin in both the segments and that the comparable companies PLI should be OP/Sales. We hold and direct accordingly.
As far as ground Nos.8 and 9 are concerned, the factual details are that in the Textile Machinery Manufacturing segment, the assessee had applied TNMM for benchmarking the transactions with the AE and undertaken a search for comparables and arrived at 3 companies. They were: Comparable Company Average NPI Kusters Calico 5.19% Machinery Ltd. Laxmi machine Works 6.98% Ltd. Batliboi Ltd -3.78% IT(TP)A Nos.355, 2127/Bang/2016 Page 6 of 21 9. The arithmetic mean operating profit margin of comparable companies turned out to be 2.80%. The financial results of KTTM (the assessee) indicated that the assessee company had an operating profit margin of 5.65% during the year under consideration. Thus, it was claimed that the international transactions of KTTM were in accordance with arm’s length standard required under the Indian regulation.
The TPO however rejected two of the comparable companies taken by the assessee in the TP study of the assessee. The two comparables rejected by the TPO were:
1. 1. Kusters Calico Machinery Ltd.
2. Batliboi Ltd.
The TPO then undertook an independent search for comparables and added two new comparables to the list and recomputed the margin of the comparable company selected by the assessee. The comparables being:
Comparable Company OP/ Cost Hindoostan Mills Ltd. 16.30% Veejay Laxmi Engg Works Ltd. 9.31 Laxmi Machine Works Ltd. 12.30
The PLI of the following 3 comparables were arrived at 12.64 on cost as against 5.65 computed by the assessee company. Consequently, ALP was determined by the TPO which resulted in an addition to the total income of the assessee. The assessee raised twofold objections in front of the DRP. The first ground of objection was related to the TPO considering OP/TC as the PLI instead of OP/ Sales taken by the assessee without providing any reason for rejecting PLI used by the assessee in the TP IT(TP)A Nos.355, 2127/Bang/2016 Page 7 of 21 documentation. The second objection was with regard to the margin computed by the TPO of the two comparables company being:
1. 1. Hindoostan Mills Ltd 2. Laxmi Machine Works Ltd.
13. The Ld. DRP however erred in adjudicating upon a wrong comparable as opposed to the contention raised by the assessee in the grounds of appeal
. The Ld. DRP gave findings in relation to: 1. Laxmi Machine Works Ltd 2. Veejay Lakshmi Engineering Works Ltd.
14. Thus the DRP failed to adjudicate upon “Hindoostan Mills Ltd” been taken as a comparable company which was the plea raised by the assessee.
15. It is pertinent to mention that the assessee never raised any objection in relation to Veejay Lakshmi Engineering works being taken as a comparable on which the Ld. DRP has adjudicated upon. Thus, the Ld. DRP erred in not adjudicating upon the actual ground raised by the assessee and instead gave findings on the wrong comparable company. This issue was also raised via a Rectification petition filed by the assessee u/s 154 of the Act. On 03.12.2015 which remains uncomplied with.
We are of the view that the grievance of the assessee will be addressed if the TPO is directed to consider the comparability of Hindustan Mills Ltd., with the assessee. In this regard, we find that Hindustan Mills Ltd., as seen from the Annual Report of this company, is engaged in the manufacture of textiles whereas the segment in respect of which the TP analysis is to be carried out in textile manufacturing segment. Both are clearly functionally not comparable. This aspect has not been considered by the DRP and therefore we deem it fit and proper to restore the IT(TP)A Nos.355, 2127/Bang/2016 Page 8 of 21 comparability of Hindustan Mills Ltd., to the TPO/AO for consideration afresh.
17. Without prejudice, the assessee has made a prayer that the correct margin of Hindustan Mills Ltd., should be taken. We are of the view that in the event of this company being considered as a comparable company, the claim of the assessee that the correct margin of this company is 7.27% as against 14.02% taken by the TPO should also be examined afresh, after due opportunity of being heard to the assessee. 18. With regard to exclusion of Laxmi Machine Works Ltd., the comparability of this company though raised as a ground before the DRP has not been considered by the DRP and therefore we deem it appropriate to set aside this issue also to the TPO/AO for consideration afresh. The TPO will also examine the claim of the assessee that the margin of this company is 8.35% as against 10.95% taken by the TPO apart from functional comparability of this company. The AO/TPO is directed to compute the ALP of the international transactions after affording opportunity of being heard to the assessee in accordance with the directions contained in this order. 19. As far as the corporate tax issues are concerned, the same are projected in ground Nos.11 to 14. Section 115JB of the Act provides that notwithstanding anything contained in any other provision of the Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April,2007, is less than ten per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of ten per cent. The assessee being a company the provisions of IT(TP)A Nos.355, 2127/Bang/2016 Page 9 of 21 Sec.115JB of the Act were applicable. It is also not in dispute that the income tax payable on the total income as computed under the Act in respect of the previous year relevant to AY 2007-08 was less than 10% of its book profits and therefore book profit should be deemed to be the total income of the assessee and tax payable by the assessee on such total income shall be 10% of such total income. Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). In so preparing its book of accounts including profit and loss account, the company shall adopt the same accounting policies, accounting stand and method and rates for calculating depreciation as is adopted while preparing its accounts that are laid before the company at its annual general meeting in accordance with provisions of Sec.210 of the Companies Act. Explanation below Sec.115JB of the Act provides that for the purposes of section 115JB of the Act, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by— certain items debited in the profit and loss account in arriving at the net profit and as reduced by- certain items that are credited in the profit and loss account. In other words, all that one has to do, while computing book profits is to take the profit as per profit and loss account prepared in accordance with Companies Act, 1956 and make additions or subtraction as is given in the explanation to Sec.115JB(2) of the Act.
20. The assessee while computing its book profit u/s 115JB of the Act added for bonus of Rs.41,87,434/-, and provision for long service award of Rs. 5,22,921/- and provision for gratuity Rs.47,80,000/- by treating the same as ascertained liability, while computing the 'book profits' under section 115JB of the Act. According to the AO, the provision for liability is in the nature of unascertained liability and as per Explanation below IT(TP)A Nos.355, 2127/Bang/2016 Page 10 of 21 Sec.115JB (2) of the Act, those sums have to be added to the profit as per profit and loss account for arrive at book profit u/s.115JB of the Act.
21. Thus the DRP regarded assessee’s submissions with regard to “Lakshmi Machine Works Ltd. and “Veejay Lakshmi Engineering Works Ltd. ( as against “Hindoostan Mills Ltd.”) as being incorrect and of being factual in nature could be verified by the AO/TPO.
22. Before the Tribunal, the primary submission is that ‘’Hindoostan Mills Ltd.” considered by the TPO/DRP is functionally not a comparable. The said comparable is involved in the sale of clothes whereas the assessee company is engaged in manufacturing of textile machinery. Further it is also submitted that the TPO in the show cause notice dated 12.01.2015 herself mentioned the main product /service group of Hindoostan Mills Ltd. as Cloth (Fabric). (PB Page 250-252). Thus the company being functionally different from that of the assessee should not be considered as a comparable. However, in the alternate it was submitted that even if the said company is to be considered as a comparable, then the assessee prays to consider the correct margin of the said comparable at 7.27% as against 14.02 taken by the TPO and upheld by the DRP.
23. Similarly with regard to the other comparable company being Laxmi Machine works, the assessee accordingly prays that the margin be taken as 8.35 as against 10.95 taken by the TPO.
Thus, even if the comparables selected by the TPO in the fresh search it conducted is still to be taken as the final set of comparables, the assessee submitted that the margin be recomputed in the light of assessee’s submissions. The final outcome of the said recomputation would result in:
IT(TP)A Nos.355, 2127/Bang/2016 Page 11 of 21 Comparable Company Recomputed Margins Hindoostan Mills Ltd. 7.27 Lakshmi Machine Works 8.35 Veejay Laxmi Engineering 8.51 Works Ltd. Mean 8.04 25. Thus the arithmetic mean operating profit margin of comparable companies being 8.04 would still be within +/- 5% of the operating profit margin of 5.65% of the assessee company during the year under consideration.
As far as the additional ground raised by the assessee is concerned, the same is in relation to the issue whether education cess can be allowed as a deduction under section 37(1) of the Act or has to be disallowed under section 40(a)(ii) of the Act. The additional ground of appeal being a legal ground is admitted for adjudication. ITAT Kolkata Bench in the case of Kanoria Chemicals & Industries Ltd. Vs Addl. CIT (ITAT Kolkata) Appeal Number Order dated 26/10/2021, dealt with identical additional ground as raised by the assessee in this appeal and held as follows:
“15. The assessee has taken the following additional ground of appeal:-
Additional Ground. I. On the facts and circumstances of the case and in law, the Assessing Officer/ CIT(A) ought to have allowed deduction of Education Cess amounting to Rs. 3,19,95,9981- in terms of law laid down by the Hon’ble Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd. [ITA o. 52/Raj/2018 ruling dt. 31.7.2018] and further Hon’ble Kolkata Tribunal in case of ITC Ltd. [ 14 ruling dt. 27.11.20 18 ]
16. As per the provisions of section 40(a)(ii) of the Income-tax Act, 1961 ( in short, the ‘Act’) ‘any rate or tax levied’ on profits and gains of business or profession’ shall not be deducted in computing the IT(TP)A Nos.355, 2127/Bang/2016 Page 12 of 21 income chargeable under the head ‘profits and gains, business or profession.
The Ld. Counsel for the assessee has submitted that ‘Cess’ has not been specifically mentioned in the aforesaid provisions of section 40(a)(ii) and, therefore, Cess is an allowable expenditure. He in this respect has relied upon the “CBDT Circular No. 91/58/66-ITJ(19) dated 18-05-1967”, wherein it has been interpreted that the ‘Cess’ shall not be disallowable. The said Circular for the sake of ready reference is reproduced as under:- “Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 – Clarification regarding.- “Recently a case has come to the notice of the Board where the Income Tax Officer has disallowed the ‘cess’ paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act.
2. The view of the Income Tax Officer is not correct. Clause 40(a)(ii) of the Income Tax Bill, 1961 as introduced in the Parliament stood as under:- “(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion ot, or otherwise on the basis of, any such profits or gains”. When the matter came up before the Select Committee, it was decided to ‘omit the word ‘cess’ from the clause. The effect of the omission of the word ‘cess’ is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards. – 3. The Board desire that the changed position may please be brought to the notice of all the Income Tax Officers so that further litigation on this account may be avoided.{Board’s F . No.91/5B/66-ITJ(19), dated 18-5-1967.
The Learned Counsel for the assessee in this respect has further relied upon the decision of the Hon’ble Bombay High Court in the case of “Sesa Goa Limited Vs. JCIT“ (2020) 117 taxmann.com 96 and further on the decision of the Hon’ble Rajasthan High Court in the case of “Chambal Fertilizers & Chemicals Ltd Vs. JCIT”: D.B Income-tax Appeal No. 52/2018 decided on 31-07-2018, wherein, the Hon’ble High Court/s relied upon the aforesaid CBDT Circular Dt. 18-05-1967(supra) and in view of the interpretation made by the CBDT have held that ‘education cess’ can be claimed as an allowable deduction while computing the income chargeable under the heads of profits and gains of business or profession. The Learned Counsel has further relied upon the following decisions of the Co-ordinate Benches of this Tribunal, who have followed the aforesaid judgments of the Hon’ble High Courts: a. Decision of Kolkata Bench of the Tribunal in IT(TP)A Nos.355, 2127/Bang/2016 Page 13 of 21 the case of DCIT Vs. ITC Infotech India Ltd, dt. 23-10-2019 b. Decision of Kolkata Bench of the Tribunal in the case of Tega Industries Ltd Vs. ACIT, ITA No. 404/Kol/2017 dt. 23-8-2019 c. Decision of Kolkata Bench of the Tribunal in the case of SREI Infrastructure Finance Ltd Vs. Addl. CIT, R-9, ITA No. 1318/Del/2012 dt. 31-12-2019.
However, with due respect to the decisions of the Hon’ble Bombay High Court and Hon’ble Rajasthan High Court and of co-ordinate Benches of this Tribunal, we find that the issue is squarely covered by the decision of the Hon’ble Apex Court of the country in the case of “CIT Vs. K. Srinivasan” (1972) 83 ITR 346, wherein the following questions came for adjudication before the Hon’ble Apex Court:- “Whether the words “Income tax” in the Finance Act of 1964 in sub-s (2) and sub-s.(2)(b) of s. 2 would include surcharge and additional surcharge.”
The Hon’ble Supreme Court answered the question in favour of revenue observing as under:- “In our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income tax. The meaning of the word “surcharge” as given in the Webster’s New International Dictionary includes among others “to charge (one) too much or in addition ” also “additional tax”. Thus the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to s. 2 of the Finance Act 1963 it would lead to the result that income tax and super tax were to be charged in four different ways or at four different rates which may be described as (i) the basic charge or rate (In part I of the First Schedule); (ii) Surcharge; (iii) special surcharge and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way the additional charges form a part of the income tax and super tax”.
The Hon’ble Supreme Court, therefore, has decided the issue in favour of the revenue and held that surcharge and additional surcharge are part of the income-tax. At this stage, it is pertinent to mention here that ‘education cess’ was brought in for the first time by the Finance Act, 2004, wherein it was mentioned as under:- “An additional surcharge, to be called the Education Cess to finance the Government’s commitment to universalise quality IT(TP)A Nos.355, 2127/Bang/2016 Page 14 of 21 basic education, is proposed to be levied at the rate of two per cent on the amount of tax deducted or advance tax paid, inclusive of surcharge.”
The provisions of the Finance Act 2011 relevant to the Assessment Year under consideration i.e. 2012-13 are also relevant. For the sake of ready reference, the same is reproduced hereunder:- 2(11) The amount of income-tax as specified in sub-sections (1) to (10) and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be further increased by an additional surcharge for purposes of the Union, to be called the “Education Cess on income-tax”, calculated at the rate of two per cent. of such income- tax and surcharge, so as to fulfil the commitment of the Government to provide and finance universalised quality basic education.
A perusal of the aforesaid provisions of the Finance Act 2004 and Finance Act 2011 would show that it has been specifically provided that ‘education cess’ is an additional surcharge levied on the income- tax. Therefore, in the light of the decision of the Hon’ble Supreme Court in the case of “CIT Vs. K. Srinivasan” (supra) the additional surcharge is part of the income-tax. The aforesaid decision of the Hon’ble Apex Court and the provisions of Finance Act, 2004 and the relevant provisions of section 2(11) & (12) of the subsequent Finance Acts have not been brought into the knowledge of the Hon’ble High Courts in the cases of ” Sesa Goa Ltd” & “Chambal Fertilisers” (supra). Since the decision of the Hon’ble Supreme Court prevails over that of the Hon’ble High Courts, therefore, respectfully following the decision of the Hon’ble Supreme Court in the case of “CIT Vs. K. Srinivasan” (supra), this issue is decided against the assessee. The additional ground of assessee’s appeal is accordingly dismissed.”
Following the aforesaid decision, we dismiss the additional ground raised by the assessee. The aforesaid amounts admittedly were credited in the profit and loss account. According to the AO, the aforesaid sum had to be included as part of the book profits u/s 115JB of the Act as it is not one of the item of income which has to be excluded from the net profit as per profit and loss account, set out in the explanation below Sec.115JB(2) of the Act. The CIT(A) confirmed the action of the AO.
IT(TP)A Nos.355, 2127/Bang/2016 Page 15 of 21 28. As far as Provision for Bonus and Gratuity is concerned, the provision is created on the basis of payment of Bonus Act, 1965 and Gratuity Act, and there is certainty in incurring the said liability. The said provision is being estimated with reasonable certainty thereby making it ascertained and not unascertained. The provision is being determined based on consistent policy followed by the company. The assessee has obtained a certificate from the Chartered Accountant that computation of allocable surplus is as per the provisions of payment of Bonus Act, 1965. The said provision is being estimated with reasonable certainty thereby making it ascertained and not unascertained: The following judicial pronouncements support the plea of the assessee wherein it was held that provisions estimated as per the Payment of Bonus Act, 1965 is an ascertained liability and cannot be added for the purpose of computing book profit u/s.115JB of the Act. (i) Stanley Black & Decker India Limited Vs DCIT-3(1) Mumbai (2017 (11) TMI (1147)-ITAT Mumbai (ii) DOT -11, Bangalore Vs M/s L & T Valdel Engineering P Ltd 2015 (6) TMI 934- ITAT Bangalore.
As far as provision for long services award of Rs.5,22,921/- is concerned, the CIT(A) has not adjudicated on this ground. The provision for Long Service Award is computed on a scientific basis based on actuarial valuation conducted by an actuary and amounts computed as per actuarial valuation of does not make it provision for an unascertained or contingent liability. The assessee has submitted copies of actuarial valuation reports pertaining to Long Services Award it the submissions to the TPO as well as CIT(A). The said provision is capable of being estimated with reasonable certainty thereby making it ascertained and not unascertained. The following judicial pronouncements support the plea of the assessee in this IT(TP)A Nos.355, 2127/Bang/2016 Page 16 of 21 regard : (i) Stanley Black & Decker India Limited Vs DCIT-3(1) Mumbai (2017 (11) TMI 1147)-ITAT Mumbai (ii) DCIT -11, Bangalore Vs M/s L & T Valdel Engineering P Ltd 2015 (6) TMI 984-ITAT Bangalore. (iii) DCIT, Circle-11(1), New Delhi Vs Eicher Motors Ltd 2017(2)TMI 795 (iv) DCIT, CC-18, New Delhi vs Brentwoods Vs. International Ltd 2017 (9) TMI 474 - ITAT Delhi (v) DCIT Vs Pragati Glass Works P Ltd 2017(5) TMI.
In the light of the judicial pronouncements referred to above, we are of the view that the provision for bonus as well as provision for long term service are both ascertained liability and cannot be added to book profit under section 115JB of the Act. We hold and direct accordingly.
In the result, appeal of the assessee is partly allowed.
IT(TP)A No.2127/Bang/2016 : As far as this appeal is concerned, the grounds raised
by the assessee in this appeal are only relating to determination of ALP in respect of international transaction of textile machinery manufacturing segment and auto components manufacturing segment. In both these segments, raw materials and components are imported from the AE that are used in manufacture of textile machinery and auto components. The proportionate of raw materials imported from the AE was 16.60% and 14.42% in the textile machinery manufacturing segment and auto components manufacturing segment respectively. In the appeal for Assessment Year 2012-13, the learned Counsel for the assessee has pressed for adjudication of only ground Nos.2 and 3. These grounds read as follows: That the Learned AO/ Learned Panel erred in law in not 2. restricting the transfer pricing ("TP") adjustment to the cost relating to import of raw materials from the associated enterprises i.e., 16.6o% and 14.42% of the total cost, with IT(TP)A Nos.355, 2127/Bang/2016 Page 17 of 21 respect to the auto components manufacturing segment and the textile machinery manufacturing segment, respectively. That the Learned Panel erred in law and on facts in 3. disregarding the application of gross profit ("GP")/ Sales, as the appropriate profit level indicator with respect to the auto components manufacturing segment.
As far as ground No.2 is concerned, the prayer of the learned Counsel for the assessee was that the TPO while determining the ALP and making an addition, has taken the entire segmental sales in the textile machinery segment and auto components segments without restricting the addition only in respect of the international transaction viz., that component of the raw material and components that were imported from the AE and used in the manufacture of textile machinery and auto components. On this issue, in Assessment Year 2011-12, the DRP has specifically given the following directions accepting the plea of the assessee that the adjustment should only be restricted to transaction with AE, with the following observations: “4.1 On the above issue, detailed submissions have been made by the assessee and the same have duly been considered. Similar objection was raised by the assessee for AY 2010-11 before DRP and after examining the same DRP had directed that the adjustments need to be restricted to the cost relating to the imports of material from the AE. Similar issue arose in the case of assessee itself for AY 2006-2007 before ITAT. In its decision dated 14/11/2014 in IT(TP)A No. 1401/Bang/2007, ITAT directed the assessing officer to confine the adjustments qua the purchases made by the assessee from AE. In the year under consideration also the calculation of adjustment u/s 92CA has been done without excluding the non AE purchases. So the AO/TPO is directed to recalculate the adjustment to be made by excluding the non AE transactions done by the assessee. So the objection of the assessee is decided in above terms.”
Even otherwise, the law is well settled that the addition by way of determination of ALP can be made only in respect of the international IT(TP)A Nos.355, 2127/Bang/2016 Page 18 of 21 transaction and not to the entire segment that might include transactions with non-AE. The above proposition is also supported by the following decisions of the Hon'ble Bombay High Court in the case of Phoenix Mecano (India) Private Limited [ITA No. 1182 of 2014], had to deal with the following question of law suggested by the revenue:- 6.1 Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was correct in directing the AO to restrict the determination of the ALP to transactions with the AE rather than on the entire turnover of the Company. 6.2 Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct while issuing the above directions without appreciating the observations of the DRP that there was no segmental audit of the transactions of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by only restricting to transactions with AE. The Hon'ble Bombay High Court held that one has to take only the international transactions of the assessee with its AE for the purpose of determining arms length price.
The Hon'ble Mumbai Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 7032/Mum/2011] held that the ALP can only be determined on the value of international transaction alone and not on the entire turnover of the assessee at entity level. This decision was further upheld by the Hon'ble Bombay High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 2201 of 2013], which held as below:-
"2. .............. (a) Whether on facts and the circumstances of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs.)?
IT(TP)A Nos.355, 2127/Bang/2016 Page 19 of 21 3. ........... ……….. (e) We find that in terms of Chapter X of the Act, re determination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered to with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act.
In the above view, as the provisions of the Act in respect of transfer pricing are self evidence, Question No.(a) as proposed does not give rise to any substantial question of law. Thus not entertained.”
The ITAT Bangalore in the case of Kirloskar Toyota Textile Machinery Pvt. Ltd. v. ACIT [IT(TP)A No.1401/Bang/2010 held as that the determination of ALP has to be restricted qua the purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE.
We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm’s length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has IT(TP)A Nos.355, 2127/Bang/2016 Page 20 of 21 given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm’s length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE.
In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee.
Accordingly, ground No.2 raised by the assessee stands allowed. As far as ground No.3 is concerned, the issue is with regard to adoption of PLI. The assessee in this ground has prayed for adopting PLI as OP/Sales instead of OP/Total Cost. While adjudicating on identical ground in Assessment Year 2011-12, we have already upheld the plea of the assessee in this regard. Following the same, we direct the TPO to adopt PLI as OP/Sales. The TPO is directed to compute the ALP in accordance with the directions contained in this order, after affording opportunity of being heard to the assessee.
In the result, appeal by the assessee is partly allowed.
IT(TP)A Nos.355, 2127/Bang/2016 Page 21 of 21 41. In the combined result, both the appeals of the assessee are partly allowed.
Pronounced in the open court on the date mentioned on the caption page.