DEPUTY COMMISSIONER OF INCOME TAX,, PUNE vs. ATLAS COPCO (INDIA) LTD,, PUNE

आदेश / ORDER

PER R.S.SYAL, VP : These two cross appeals – one by the Revenue and the other by the assessee - arise out of the order passed by the CIT(A)-13, Pune on 16-11-2016 in relation to the assessment year 2012-13.

2 Atlas Copco (India) Limited Asst. Year 2012-13

objected to by the assessee. The only issue raised in the revised

grounds is against the deletion of transfer pricing adjustment

amounting to Rs.8.52 crore made by the Assessing Officer (AO) in

the international transaction of “Receipt of Commission”.

engaged in manufacturing of compressors and mining &

production tools. The return of income was filed accompanied by

Form No. 3CEB containing details of the international

transactions. The Assessing Officer (AO) made a reference to the

Transfer Pricing Officer (TPO) for determining the arm’s length

price (ALP) of the international transactions. The controversy

concerning the Departmental appeal is qua the ‘Receipt of

Commission’ amounting to Rs.44,29,79,820/-. The assessee

applied the Transactional Net Margin (TNMM) method for

demonstrating the international transaction at ALP. The TPO

noticed that the amount of commission charged by the assessee

varied between 3-20% of the sale value of the products of the

Associated Enterprises sold through the assessee. Taking

cognizance of the fact that the assessee was also engaged in sale of

its own manufactured goods, the TPO proceeded to determine the

3 Atlas Copco (India) Limited Asst. Year 2012-13

ALP of the Commission income w.r.t. the compensation for

marketing effort in the sale of the assessee’s own manufactured

goods. Rejecting the TNMM, he resorted to ‘other method’ as per

Rule 10AB of the Income-tax Rules, 1962. In the hue of this

method, he considered the figure of the assessee’s total cost under

the Manufacturing function at Rs.1841.00 crore with

corresponding revenue of Rs.2075.81 crore. He considered the

individual items of Marketing and Manufacturing expenses and

found out their percentage to Total costs at 4.77% and 18.45%

respectively. The overall profit from the Manufacturing activity at

Rs.257.41 crore was thus allocated in the above ratio for deducing

the figure of profit from Marketing effort at Rs.52.90 crore and the

consequential percentage of Marketing profit to sales at 2.55%.

Applying such percentage to the value of goods of the AEs sold at

Rs.532.78 crore, the TPO computed net marketing profit that

should have been earned from the sale of the AEs’ products at

Rs.13.58 crore. Such amount was increased by the expenses

actually incurred by the assesssee on making the sale of the AEs’

products at Rs.39.24 crore. In this manner, he determined the

Arm’s Length commission revenue at Rs.52.82 crore. Since the

assessee received commission of Rs.44.30 crore, the TPO

4 Atlas Copco (India) Limited Asst. Year 2012-13

proposed transfer pricing adjustment of Rs.8.52 crore. The AO

made such an addition in the assessment order. The ld. CIT(A)

deleted the addition by relying on earlier years’ orders without

discussing any merits. Aggrieved thereby, the Revenue has come

up in appeal before the Tribunal.

relevant material on record. The international transaction under

consideration is ‘Receipt of commission’ by the assessee from sale

of products of its AEs in India. The TPO adopted ‘other method’

under Rule 10AB for determining the ALP of this international

transaction. This method, in turn, provides that: `For the purposes

of clause (f) of sub-section (1) of section 92C, the other method for

determination of the arms’ length price in relation to an

international transaction or a specified domestic transaction shall

be any method which takes into account the price which has been

charged or paid, or would have been charged or paid, for the same

or similar uncontrolled transaction, with or between non-

associated enterprises, under similar circumstances, considering all

the relevant facts.’ The invocation of `other method’ as the most

appropriate method by the TPO for determining the ALP of the

international transaction as against the TNMM applied by the

5 Atlas Copco (India) Limited Asst. Year 2012-13

assessee, has not been disputed on behalf of the assessee. Even

otherwise also, this method talks of any method which takes into

account the price which has been charged or paid, or would have

been charged or paid.

adjustment at Rs.8.52 crore with the help of the following table

given at pages 12 and 13 of his order:

Total costs as above 1,841.00 Marketing expenses related to sale of product 87.84 Marketing Expenses as % of Total Costs 4.77% Manufacturing expenses 339.59 Manufacturing expenses as % of total cost 18.45% Overall profit of the company 257.41 Profit attributable to marketing and manufacturing function is in the ratio of 20.55 to 79.45 Portion of profit attributable to marketing function (20.55% 52.90 of 257.41) % Marketing profit to sales (Rs.52.90 crores/2075.81 crores) 2.55% Sales value of product sold by AE in India 532.78 Marketing profit to be earned from sale of AE’s product 13.58 (2.55% of 532.78 crores) Add : Expenditure incurred by the company on sale of AE’s 39.24 products Amount of commission to be received 52.82 Amount of commission actually received 44.30 Amount of commission less received 8.52

from those supplied by the assessee, at his instance, for finding out

the amount of profit attributable to marketing effort in the overall

manufacturing segment of the assessee, whose relevant part has

Atlas Copco (India) Limited Asst. Year 2012-13

been given at pages 566 and 567 of the paper book, reading as

under:

Refer- Particulars Working of profit Working of profit ence Attribution Attribution of (Your (Company’s goodself’s approach) approach) A Sales 2075.81 2075.81 B Total cost incurred by 1,841 1,841 ACIL B1 Material Consumption 1370.81 1370.81 B2 Manufacturing Expenses 339.59 339.59 B3 Administrative, Selling & 87.84 87.84 Distribution Expenses B4 Depreciation 42.77 42.77 C Profit Before Interest and 257.41 257.41 Tax (PBIT) D Total Costs contributing (B) 1,841 427.42 to profits E Marketing Expenses (B.3) 87.84 87.84 relating to sale of products F Marketing Expenses as % (E)/ 4.77% 20.55% of Total Costs (D) contributing to profits G Profit as above (C) 257.41 257.41 H Portion of Profit (G)*(F) 12.28 52.90 attributable to the Marketing function I % of Marketing Profit to (H)/(A) 0.59% 2.55% Sales J Sale Value of products 532.78 532.78 sold by the AEs in India K Marketing Profits to be (J)*(I) 3.14 13.58 earned from sale of AEs’ products L Add: Expenditure 39.24 39.24 incurred by the Company on sale of AEs’ products M Amount of commission (K)+(L) 42.38 52.82 should have received N Amount of commission 44.30 44.30 actually received O Adjustment proposed - (M)-(N) 8.52*

7 Atlas Copco (India) Limited Asst. Year 2012-13

determined the amount of profit attributable to the marketing effort

in the overall manufacturing segment of the assessee vis-à-vis that

computed by the assessee, it is overt that there are four types of

costs incurred by the assessee, as given under Points B1, B2, B3

and B4, namely, Material Consumption at Rs.1370.81 crore;

Manufacturing expenses at Rs.339.59 crore; Administrative

Selling and Distribution expenses of Rs.87.84 corre; and

Depreciation at Rs.42.77 crore. Total of these four items is

Rs.1841 crore, which is the opening figure in the table drawn by

the TPO for determining the ALP. Out of such four costs

aggregating to Rs.1841 crore, the TPO considered only Marketing

expenses at Rs.87.84 crore and Manufacturing expenses at

Rs.339.59 crore in his computation of profit and thus ignored the

other two expenses, namely, Material Consumption cost of

Rs.1370.81 crore and Depreciation of Rs.42.77 crore. In this

manner, the TPO computed operating profit relatable to

Manufacturing and Marketing costs in the ratio of 4.77% : 18.45%

as extrapolated to 20.55 : 79.45. That is how, he ascribed the

share of profit from the Marketing expenses in the overall kitty of

8 Atlas Copco (India) Limited Asst. Year 2012-13

profit from the Manufacturing segment of the assessee at Rs.52.90

crore in quantitative terms and 2.55 in percentage terms. It is here

that he went off the track. While attributing profit to Marketing

function from the assessee’s own manufacturing activity, the TPO

considered only two expenses, namely, Manufacturing and

Marketing and proceeded with the presumption that only these two

constituents of the total costs contributed to the earning of profits;

and the Material Cost and Depreciation did not play any role in

earning the profit from the manufacturing activity. In our

considered opinion, this approach adopted by the TPO is flawed.

One cannot conceive carrying out manufacturing activity without

incurring material cost or not employing any assets resulting into

depreciation cost. It is the aggregate of all the costs incurred which

produce the overall profit from manufacturing activity. Material

costs and also depreciation in the value of assets help in generating

profit from manufacturing activity in the same way as do the

Manufacturing and Marketing costs. In our considered opinion,

the TPO ought to have considered Material cost and Depreciation

contributing to the generation of income from manufacturing

activity in the same way as he considered the Manufacturing and

Marketing costs. If all the four costs are considered as generating

9 Atlas Copco (India) Limited Asst. Year 2012-13

the overall profit from the Manufacturing segment of the assessee,

then the percentage of Marketing profit to sales comes to 0.59% as

against 2.55% computed by the TPO, as has been depicted on the

same page no. 567 of the paper book. When such percentage of

Marketing profit to sales is applied to the sale value of the products

of the AEs sold in India through the assessee’s endeavour, then the

amount of profit pertaining to Marketing effort comes to Rs.3.14

crore. If the expenses incurred by the assessee on sale of the AEs

products at Rs.39.24 crore are added, the resultant gross amount

which should have been received by the assessee as commission

comes to Rs.42.38 crore. As against that, the assessee actually

received Commission income of Rs. 44.30 crore, which is

explicitly at ALP. We, therefore, approve the conclusion of the ld.

CIT(A) in deleting the addition.

merits of the addition and simply relied on earlier years for

deleting the addition. At this juncture, it is pertinent to mention

that the facts and circumstances of this year have some differences

vis-a-vis those of the earlier years. Firstly, the TPO applied `other

method’ as the most appropriate method for determining the ALP

of the international transaction, which method came into vogue, as

10 Atlas Copco (India) Limited Asst. Year 2012-13

per Rule 10AB, only from the A.Y. 2012-13 under consideration

and the assessee has not objected to the application of this method.

This method obviously could not have been nor has actually been

applied by the assessee or the TPO in any of the earlier years.

There can be no denial that different amounts of the ALP emerge

under different methods. Secondly, for the earlier years, the

amount of Sale considered by the Revenue for determining the

ALP consisted of sale of manufactured goods; sale of traded goods

and commission. Au contraire, the amount of sale at Rs.2075.81

crore considered in the entire exercise for the year under

consideration is only of manufactured goods and has no

components of traded goods or commission. In that view of the

matter, the findings given by the Tribunal for such earlier years do

not per se apply to the year under consideration. However, in view

of our discussion made above pointing out infirmities in the TPO’s

ALP determination, we hold that the transfer pricing addition

under `other method’ as per rule 10AB was not justified, which has

been rightly deleted in the first appeal.

following three additional grounds have been taken:

“Claim for Education Cess

11 Atlas Copco (India) Limited Asst. Year 2012-13

Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC) has observed that

“the purpose of the assessment proceedings before the taxing

authorities is to assess correctly the tax liability of an assessee in

accordance with law. If, for example, as a result of a judicial

decision given while the appeal is pending before the Tribunal, it is

found that a non-taxable item is taxed or a permissible deduction is

denied, we do not see any reason why the assessee should be

prevented from raising that question before the Tribunal for the

12 Atlas Copco (India) Limited Asst. Year 2012-13

first time, so long as the relevant facts are on record in respect of

that item”. Answering the question posed before it in affirmative,

their Lordships held that on the facts found by the authorities

below, if a question of law arises (though not raised before the

authorities) which has bearing on the tax liability of the assessee,

the Tribunal has jurisdiction to examine the same. Having gone

through the subject matter of the additional grounds espoused by

the assessee, it is apparent that the same raises a pure question of

law. We, therefore, admit the additional grounds taken by the

assessee.

Education Cess. Relying on the judgment rendered by the Hon’ble

jurisdictional High Court in Sesa Goa Lt. Vs. JCIT (2020) 423 ITR

426 (Bom.), the ld. AR submitted that the claim for Education

Cess cannot be disallowed in terms of section 40(a)(ii) of the Act.

It was further submitted that the Tribunal in earlier years has also

allowed the assessee’s similar additional ground.

material on record, it is seen as an admitted position that the

Tribunal in the assessee’s own case for earlier years has allowed

such additional ground by relying on the judgment of Hon’ble

13 Atlas Copco (India) Limited Asst. Year 2012-13

jurisdictional High Court in Sesa Goa Ltd. Vs. JCIT as well as the

judgment of Hon’ble Rajasthan High Court in Chambal Fertilisers

and Chemicals Ltd. and Another Vs. JCIT (2018) 102 CCH 0202

(Raj-HC). However, it is pertinent to note that the Finance Bill,

2022 has proposed an amendment to section 40(a)(ii) by insertion

of Explanation 3 w.e.f. 01-04-2005, reading as under :

“Explanation 3 – For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term ‘tax’’ shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.”

the legislature has proposed to neutralize the effect of the above

referred judgments granting deducting towards Education Cess.

As the proposal mooted through the Finance Bill, 2022 is likely to

be passed shortly, the deduction which was otherwise eligible and

granted in earlier years, would become non-eligible retrospectively

with effect from the assessment year 2005-06. Technically, the

amendment proposed in the Finance Bill, 2022 is yet to take the

shape of an enactment, but practically it will become operative

very shortly on the Hon’ble President of India granting assent to

the Finance Bill. Allowing such deduction now and then shortly

thereafter recalling the order in the light of the Finance Act, 2022

14 Atlas Copco (India) Limited Asst. Year 2012-13

will be an exercise in futility. We are thus not inclined to grant

such deduction. The ld. AR fairly accepted the position. However,

a liberty is given to the assessee to move rectification application

in case the proposed amendment in the Finance Bill is either not

enacted or enacted prospectively so as to align our decision with

the resultant modification. This additional ground is, therefore, not

allowed in the above terms.

claim of depreciation on the expenditure of premises. The ld. AR

submitted that consequent to the decision of the Tribunal for the

assessment year 2004-05 in relation to disallowance of expenditure

on premises to the extent of 40% of such expenses being held as

capital in nature, the assessee deserves to get the consequential

depreciation on the same.

hand bungalow for its Managing Director during the previous year

relevant to the assessment year 2004-05. Substantial repair work

was carried out, whose cost was claimed as revenue expenditure.

The AO directed that 80% of such expenditure should be

capitalized. He, therefore, treated 20% of such expenditure as

revenue and capitalized the remaining 80% on which depreciation

15 Atlas Copco (India) Limited Asst. Year 2012-13

was also granted. The assessee challenged the action of the AO

before the ld. CIT(A), who reduced the capitalized component to

40%, which got echoed by the Tribunal in the appeal. The net

effect of the above discussion is that the AO capitalized 80% of the

expenditure and granted depreciation thereon, which was reduced

by the ld. CIT(A) to 40%. The ld. AR contended that the AO, after

capitalizing 80% of the amount of repairs for the assessment year

2004-05 and granting depreciation thereon, did not increase the

corresponding value of block of assets for the next year onwards.

Ordinarily, if a particular amount is capitalized by the AO and

depreciation is granted in that year, the value of block of assets is

accordingly increased for subsequent years as well and

depreciation at the enhanced value is granted. If the action of the

AO of capitalization is partly modified and the extent of

capitalization is reduced, then amount of depreciation granted on

the higher value of block of assets by considering the original

amount disallowed by the AO, requires corresponding reduction in

the claim of depreciation. If such is the position, then the amount

of depreciation for the subsequent years should be rather reduced.

capitalization of building block from 80% to 40% which got

16 Atlas Copco (India) Limited Asst. Year 2012-13

echoed by the Tribunal, then the depreciation in the subsequent

years should be allowed only on the reduced value of block of

assets at 40% rather than 80% made by the AO. However, the ld.

AR stated that the AO did not give effect to his action of

capitalizing 80% of repairs to the block of building in subsequent

years. Under such circumstances, we deem it proper to remit the

matter to the file of the AO for carrying out necessary verification

in this regard and then decide the issue accordingly. To clarify, if

the AO, after capitalizing 80% of repairs cost for the assessment

year 2004-05, continued with the enhanced value of block in the

subsequent years as well, then the amount of depreciation on the

excess 40%, [as the capitalization reduced by the CIT(A)], should

be disallowed. If, on the other hand, the AO had not increased the

value of block of assets in succeeding years by 80% of

capitalization done by him for the assessment year 2004-05, then

further depreciation should be allowed on 40% of the capitalization

as upheld by the Tribunal in its order for the assessment year 2004-

opportunity of hearing to the assessee.

depreciation on the expenditure of software. The ld. AR submitted

17 Atlas Copco (India) Limited Asst. Year 2012-13

that the Tribunal sustained the disallowance of expenditure on

software amounting to Rs.15,60,198/- for the assessment year

2007-08 by holding it to be capital in nature. It was prayed that

consequential depreciation on the same should be given in the

subsequent year including the assessment year under consideration.

cannot survive if the AO, after capitalizing the software

expenditure amounting to Rs.15,60,198/- for the assessment year

2007-08, continued with the enhanced value of block of assets for

the purpose of depreciation in succeeding years. It is only if the

enhancement in the value of block of such assets made for the

assessment year 2007-08 was not carried out in the later

assessment years that the additional ground of the assessee would

get accepted. The AO is directed to carry out necessary

verification of this issue in the same way as directed for the second

additional ground and then pass the order.

confirmation of transfer pricing adjustment of Rs.71.00 lakh on

account of difference in price of the products sold to AEs as well

as non-AEs by applying the CUP method.

18 Atlas Copco (India) Limited Asst. Year 2012-13

international transaction of ‘Export of Manufactured goods’

amounting to Rs.266,75,78,996/-. The AO accepted the ALP of

the international transaction to the extent of exports amounting to

Rs.263.91 crore. For the remaining amount, the TPO observed that

the price charged by the assessee from its AEs was inadequate vis-

à-vis that charged for similar goods from non-AEs. Applying the

CUP method to that extent, he proposed transfer pricing

adjustment of Rs.71.00 lakh, which was made by the AO and

thereafter confirmed in the first appeal.

material on record, it is seen that similar point came up for

consideration before the Tribunal in earlier years and for the first

time in relation to the assessment year 2005-06. The Tribunal

discussed this issue in para Nos. 5 to 10 of its order, a copy placed

at page 159 onwards of the paper book, and in the final analysis

sent the matter to the AO/TPO for fresh determination in

accordance with certain direction contained therein. This view has

been followed in succeeding years as well. Both the sides are

consensus ad idem that the facts and circumstances of the ground

under consideration are mutatis mutandis similar to those of earlier

19 Atlas Copco (India) Limited Asst. Year 2012-13

years. Respectfully following the view taken for the earlier years,

we set-aside the impugned order to this extent and remit the matter

to the file of AO/TPO for re-deciding this issue in line with the

directions contained in the Tribunal order for the assessment year

2005-06.

expenses amounting to Rs.8,395/- was not pressed by the ld.AR.

The same is, therefore, dismissed.

disallowance of Rs.15,04,169/- made by the AO u/s.14A of the

Act. The facts of this ground are that the assessee earned dividend

income amounting to Rs.15,04,169/-. On being called upon to

explain as to why disallowance u/s.14A should not be made, the

assessee submitted that dividend was earned from investment of

the liquid mutual funds which was made out of surplus fund

available with the assessee company. Not convinced, the AO

computed the disallowance u/s.14A of the Act at Rs.16,71,647/-

comprising of two elements under rule 8D(2), namely, interest of

Rs.8,61,647/- and 0.50% of investments towards expenses at

Rs.8.00 lakh. The ld. CIT(A) sustained the disallowance.

20 Atlas Copco (India) Limited Asst. Year 2012-13

material on record, it is seen that the first component of

disallowance is of interest expenditure treated as relatable to

investments which yielded exempt income. Our attention has been

drawn towards the fact that as against such investments amounting

to Rs.32.00 crore, the assessee had share capital of Rs.22.56 crore

and Reserves and Surplus at Rs.802.78 crore. Thus, it can be seen

that the shareholders fund of the company is far in excess of the

investment yielding exempt income.

and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an

assessee possessed sufficient interest free funds of its own which

were generated in the course of relevant financial year, apart from

substantial shareholders’ funds, presumption gets established that

the investments in sister concerns were made by the assessee out of

interest free funds and, therefore, no part of interest on borrowings

can be disallowed on the basis that the investments were made out

of interest bearing funds. In reaching this conclusion, the Hon’ble

High Court relied on the judgment of the Hon’ble Supreme Court

in the case of East India Pharmaceutical Works Ltd. Vs. CIT

(1997) 224 ITR 627 (SC). Similar view has been taken by the

21 Atlas Copco (India) Limited Asst. Year 2012-13

Hon'ble Dehi High Court in CIT vs. Tin Box Company (2003) 260

ITR 637 (Del), holding that when the capital and interest free

unsecured loan with the assessee far exceeded the interest free loan

advanced to the sister concern, disallowance of part of interest out

of total interest paid by the assessee to the bank was not justified.

More recently, the Hon’ble Supreme Court in CIT(LTU) VS.

Reliance Industries Ltd. (2019) 410 ITR 466 (SC) has reiterated the

same view. When we examine the amount of Investments at

Rs.32.00 crore as against the availability of Share Capital and

Reserves at Rs.802.78 crore, it becomes evident that the amount of

such Investments is much less than the amount of Shareholders’

fund. We, therefore, order to delete the first component of

disallowance on account of interest amounting to Rs.8,61,647/-.

towards administrative expenses, which was computed by applying

0.50% of the average value of the investments in terms of Rule

8D(2)(iii). Such disallowance made and sustained in the first

appeal is strictly in conformity with the said rule and, therefore,

does not require any interference. We, therefore, sustain the

addition at Rs.8.00 lakh as against Rs.16.71 lakh made by the AO

and approved in the first appeal.

22 Atlas Copco (India) Limited Asst. Year 2012-13

of the assessee is partly allowed. Order pronounced in the Open Court on 18th February, 2022.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 18th February, 2022 सतीश

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to:

Atlas Copco (India) Limited Asst. Year 2012-13

Date 1. Draft dictated on 17-02-2022 Sr.PS 2. Draft placed before author 18-02-2022 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *