THE DCIT, CIRCLE-4,, AHMEDABAD vs. GMM PFAULDER PVT. LIMITED,, AHMEDABAD

आदेश/ORDER

I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 2 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT

PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

These are three cross appeals filed by the assessee and the Department for assessment years 2010-11, 2011-12 and 2012-13. Since common issues are involved in all the years under consideration, the same are being taken up together.

Assessment year 2010-11: Assessee’s ground of appeal:

“1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case. 2. The Learned Commissioner (Appeal) erred in not deciding ground no 2(d) us under: "The learned Assessing officer erred in fact and in law in not considering Nile Ltd as comparable in applying Transactional Net Margin Method on invalid ground that Nile Ltd is engaged in different kinds of activity i.e. glass lined equipment division, lead division and wind energy." 3. The Learned Commissioner (Appeal) erred in disallowing Rs. 91,624/- on ad-hoc basis being 10% of the value of purchases from Glass Steel Parts and Services (Unit of Pfaulder Inc.). 4. The Learned Commissioner (Appeal) erred in disallowing Rs. 19,926/- on ad-hoc basis being 10% of the value of services received from Pfaulder Inc. 5. The Learned Commissioner (Appeal) erred in disallowing Rs. 60,873/- on ad-hoc basis being 10% of the value of services received from Mavag AG. 6. The Learned Commissioner (Appeal) erred in directing the A.O. to work out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis.

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Additional Grounds of appeal: “Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT.

Department’s grounds of appeal:

“1. The Ld.CIT(A) has erred in law and on facts in deleting the upward adjustment of Rs.1,83,53,946/- made on the International Transactions.

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Assessment year 2011-12: Assessee’s ground of appeal:

“1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case.

Additional Grounds of appeal:

“Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT.

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without appreciating fact that cess is revenue expenditure and same is not debarred by section 40(a)(ii) of the Act. Appellant craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal.”

Department’s grounds of appeal:

“1. The Ld.CIT(A) has erred in law and on facts in partly deleting upward adjustment made by the AO with regard to Arms length price without properly appreciating the facts of the case and the material brought on record.

Assessment year 2012-13: Assessee’s ground of appeal: “1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case.

"The learned Assessing officer erred in fact and in law in not considering Nile Ltd as comparable in applying Transactional Net Margin Method on invalid ground that Nile Ltd is engaged in different kinds of activity i.e. glass lined equipment division, lead division and wind energy."

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Additional Grounds of appeal:

“Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT.

Appellant craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal.”

Department’s grounds of appeal:

“1. The Ld.CIT(A) has erred in law and on facts in partly deleting upward adjustment made by the AO with regard to Arms length price without properly appreciating the facts of the case and the material brought on record.

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3.1 We shall first take up assessee’s grounds of appeal. At the outset the counsel for the assessee submitted that he shall not be pressing for the additional grounds of appeal in relation to the grounds for deduction of cess paid by the assessee and the additional ground relating to proportionate adjustment in respect of international transaction with associated Enterprises in absence of segmental accounts. Accordingly the additional Grounds are being dismissed as being not pressed.

Ground number 2: Exclusion of Nile Ltd as comparable in applying Transaction Net Margin Method (TNMM)

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During the year under consideration, the assessee had entered into certain international transactions. The AO rejected the TP document on the ground that Nile Ltd cannot be considered as a comparable. Further, the assessee had selected cost plus method (CPM) as most appropriate method in some of the cases. The AO however rejected the CPM adopted by the assessee on the ground that in public databases as well as in the annual reports of the companies, the calculation of such gross profit margin was not available and therefore, the application of CPM can only be on estimated basis and no accurate calculation was possible. The AO, accordingly adopted TNMM method as the most appropriate method. Thereafter, he adopted return on total cost as profit level indicator (PLI) and also took Swiss Glass Coat Equipment Ltd. as the comparable and adopted profit margin of 13.27% on the operating cost of the company on entity level and made an adjustment of � 1,83,53,946/- under section 92CA of the Act.

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warranty etc. These transactions are not related and the nature of transaction itself shows that it cannot be said that the price of one transaction has been affected by the other transaction or group of transactions which have been termed as “international transactions”. Therefore, in these circumstances, Ld. CIT(Appeals) held that it would be unfair to club are all the transactions together and apply the TNMM to all transactions. The Ld. CIT(Appeals) observed that out of total of 17 international transactions, 7 transactions of the in the nature of purchase, 4 transactions are in the nature of sale of equipment and raw material, 3 international transactions are related to services receipt for which the payment has been made to the AE. The other transactions are royalty payment, commission received and interest income. Therefore, Ld. CIT(Appeals) held that it would be appropriate to examine each transaction separately and to decide whether the same is at arm’s-length or not. Accordingly, Ld. CIT(Appeals) examined each of the transactions undertaken by the assessee and in some cases made adjustments in respect of the same. The assessee is in appeal against us on the ground firstly, that Ld. CIT(Appeals) has not adjudicated on whether Nile Ltd. has been correctly expluded from the list of comparables while computing ALP and secondly, Ld. CIT(Appeals) has erred in disallowing and adding back certain percentage of sales/purchase on ad hoc basis.

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however, at the time of passing the order, Ld. CIT(Appeals) completely ignored the assessee’s submissions on this issue and proceeded to compute the ALP in respect of each of the individual international transactions undertaken by the assessee and made ad hoc disallowances @10% in respect of some of the transactions. The counsel for the assessee submitted that ALP in respect of international transactions cannot be accurately computed in absence of Nile Ltd. as a comparable company for the reason that firstly, in the assessee’s line of business there are primarily three important players: the market share of the assessee in this line of business is 54%, 27% of the business was with Swiss Glass Coats Equipment Ltd and the remaining 19% of the business was with Nile Ltd. Accordingly, in respect of international transaction in assessee’s line of business, ALP cannot be computed if Nile Ltd is to be excluded from the list of comparables. The AO excluded Nile Ltd on the ground that firstly, the assessee did not give the details of any search process carried out by him for selection of comparables and in the TP report the assessee gave names of only two comparables Swiss Glass Coats Equipments Ltd and Nile Ltd for the purpose of computation of ALP in respect of international transactions, secondly, Nile Ltd is functionally different from the assessee’s business since from the annual accounts of the company, it is seen that it is engaged in different kind of activities which have been classified into three divisions: glass lined equipment division, lead division and wind energy division, where the turnover of the glass lined equipment division is only 21% of the total turnover and consequently, this entity cannot be compared as comparable on the entity level with the assessee. The AO further observed that in respect of Nile Ltd, while the glass lined equipment division contributed 21% of the total revenue, the

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utilisation of assets of this division is 43% of the total assets. Considering such disparity in the use of assets for different divisions, the AO held that it is not possible to reliably ascertain the adjustments which are required to be made to make this segment comparable to the assessee company. Accordingly, the AO rejected Nile Ltd as a comparable. The counsel for the assessee submitted that the AO has taken into consideration irrelevant considerations at the time of rejection of Nile Ltd. a comparable. The AO has not appreciated the fact that there are only three major players in this line of business and Nile Ltd therefore cannot be excluded from the list of comparables since it would make the whole exercise of determining ALP meaningless and inaccurate. The AO did not appreciate the fact that the basis on which he rejected Nile Ltd is extraneous and irrelevant to the instant set of facts and further, the AO has not brought forth other companies which could be taken as comparable once Nile Ltd is excluded, and the entire ALP was computed on the basis of one comparable company i.e. Swiss Glass Coats, which makes the whole exercise of computation of ALP erroneous and skewed. Further, Ld. CIT(Appeals) has omitted to completely consider this aspect in the appellate order.

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specifically raised this issue before Ld. CIT(Appeals), however, we observe from the records that the Ld. CIT(Appeals) has not made any observations on this issue on hand. We further observe from the records that the assessee for earlier years had worked out TNMM by including Nile Ltd as comparable and this working was not challenged by the AO in the assessment orders placed on record before us for assessment years 2007-08, 2008-09 and 2009-10. However, we equally note that the issue whether Nile Ltd should be taken as a comparable while computing TNMM was also never disputed/challenged by the Tax Department in any of the earlier assessment years on the ground that Nile Ltd had various divisions and there was disparity in asset use i.e. this glass line division of Nile Ltd was more capital intensive, and hence it is not functionally comparable to the assessee’s case . Though the Department has impliedly accepted Nile Ltd as a comparable while computing TNMM, but since the issue of segmental accounts was not raised / examined at any earlier point in time by the Department, it is not possible to ascertain whether the facts in respect of Nile Ltd as a comparable in the earlier years are same as compared to facts prevailing in the present year. The Department has raised the issue of comparability of Nile Ltd. as a comparable with the assessee for the first time during the year under consideration and in any of the earlier years, this issue was not considered or analysed by the Department. Further, though the assessee made factual and legal submissions on this issue before Ld. CIT(Appeals) in support of the acceptability of Nile Ltd as a comparable, however, he also inadvertently omitted to make any observation/given any findings in respect of the same in the appellate order.

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8.1 Accordingly, in our considered view, in the interests of justice, this ground is being restored to the file of Ld. CIT(Appeals) for adjudication on this aspect in light of the arguments put forward by the counsel for the assessee on this issue on whether it would be appropriate for Nile Ltd to be excluded as comparable, since as per the assessee it is one of the eminent players in this line of business and exclusion thereof would render the entire exercise of computation of ALP meaningless in the instant set of facts.

Ground Numbers 3 to 5 of the assessee’s appeal:

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Ground number 6: ALP of loan given by the assessee to foreign subsidiary at the rate of interest Swiss Libor+200 basis points: 13. The brief facts in relation to this ground of appeal are that the assessee, during the course of business, had provided a loan to its wholly- owned foreign subsidiary in connection with acquisition of company situated in Switzerland, engaged in a similar business as that of the assessee company. On the said loan, the assessee had charged interest based on the market rate of Swiss Libor (CHF Libor) plus an additional spread margin of 1.25% per annum. However, the AO did not accept the ALP of the assessee and computed the ALP as per TNMM. In appeal before Ld. CIT(Appeals), the assessee submitted that since it had received the actual interest at more than the Swiss Libor rate, the ALP should not be more than the actual interest income and the computation of ALP under TNMM is not justified. The main contentions of the assessee were that:

(i) the assessee has not given interest free loan (ii) the assessee has charged interest based on the market rate of Swiss Libor at the beginning of the quarter with additional spread margin of 1.25% per annum. The assessee has selected CUP method as the most appropriate method. The interest income of � 31,35,469/- has been credited under the head income in the profit loss account (iii) the AO has computed ALP under TNMM without assigning any reason

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The assessee submitted that where assessee is not in the business of granting loans, the arm’s-length interest rate is not the interest rate charged by the domestic bank as a comparable rate. The appropriate arm’s-length interest in such case would be Libor based on CHF Libor based interest rates. Since the assessee has charged interest more than the Swiss Libor rate, interest received is to be considered to be at arm’s-length.

“16. The transaction at Sr. No. 17 being receipt interest income from its AE has been explained by the appellant as at Arm's length price, as it has charged the interest rate by taking into account the Swiss LIBOR and an additional spread of 1.25%. The appellant has also produced quotation from Citibank which mentions the interest rate at Swiss LIBOR +150 bps. The claim of the appellant that it has charged more interest as compared to the Swiss LIBOR and, therefore, the transactions were at Arm's length is not acceptable. The appellant has not taken into account the effect of foreign exchange fluctuation and also the adequate spread which is normally considered in such type of loan transactions. It is further noted that the appellant has itself charged less interest rate by 25 bps as compared to what was quoted by Citibank. Therefore, to that extent the transition of interest is not at Arm's length price. The appropriate Arm's length margin for the loan would be Swiss LIBOR +200 basis points to take into account the spread as well as foreign exchange fluctuation risk. The AO is accordingly directed to work out the Arm's length price and make the addition. The ground of appeal is accordingly, partly allowed.”

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CIT(Appeals) in the appellate order. In view of the above, in the interest of justice, we are restricting the addition to interest rate at Swiss Libor plus 150 basis points, equivalent to the quotation obtained by the assessee from Citibank in respect of the said loan. 16. In the result, ground number 7 of the assessee’s appeal is partly allowed.

Ground number 7: disallowance of � 3,22,431/- being administrative expenses under section 14A of the Act:

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making investments in shares and mutual funds. He further accepted that the assessee has been able to demonstrate that the funds for making the investments were separate and there is no mixing of fund. The investments in interest free funds were made from a bank account held in Citibank, Mumbai and the funds in that account were interest free. Further, the examination of the interest expenditure shows that such interest expenditure is in the relation to specific expenditure only and cannot be considered for making general disallowance out of interest by applying the Rule 8D. However, regarding the administrative expenses, the Ld. CIT(Appeals) observed that the assessee made disallowance of � 96,326/- in the return of income. It has a disallowed the staff salary and telephone expenses in proportion to the exempted total income. However, the Ld. CIT(Appeals) observed that the methodology adopted by the assessee is not scientific and further the assessee has not made disallowance on actual basis. The disallowance has been made on estimated basis in proportion to the income. Before Ld. CIT(Appeals), the assessee submitted that the Ld. CIT(Appeals) in assessment year 2009-10 has restricted the disallowance to the disallowance made by it in the return of income on the ground that no finding was given by the AO as to why the method adopted by the assessee for making the disallowance on estimated basis was incorrect. However, the Ld. CIT(Appeals) held that the administrative expenditure which needs to be disallowance has to be worked out in view of the provisions of Rule 8D and applying the same, he held that the disallowance made by the AO amounting to � 3,22,431/- is in accordance with Rule 8D in respect of administrative expenses and accordingly, the same is required to be disallowed.

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“11. From going through the above method we find that three limbs which in total arrives at the amount of disallowance 14A of the Act. In the first limb Id. Assessing Officer has made disallowance but the assessee has himself offered Rs.30,347 /- as disallowance towards specific expenditure for earning exempt income as observed by auditor as well as by ld. CIT(A) and we also accept the same. Going further towards disallowance under second limb relating to interest expenditure we find that as per the detailed submissions made by assessee before the lower authorities, the observation made by Id. CIT(A), decision of the Co- ordinate Bench in the case of assessee's own case in ITA No.318/Ahd/2011 (supra) and looking to the facts of the case that interest expenditure is only towards to the working capital limit specifically used for the purpose of business and assessee company having sufficient interest free funds, proves that only interest free funds have been used to invest in shares and mutual funds. Further we observe that is in conformity with the order of the Tribunal, deleting the entire disallowance u/s 14A of the Act on the ground that assessee had sufficient interest free funds out of which investment was made is in conformity with the judgment of Hon. Jurisdictional High Court in the case of Principal, CIT vs. India Gelatine and Chemicals Ltd. (supra). Respectfully following the judgment of Hon. Gujarat High Court in the case of Principal CIT vs. India Gelatine & Chemicals Ltd. (supra) and the observation made above, we find that no disallowance is called for in the second limb of rule 8-D relating to interest expenditure. Now coming to the third limb towards administrative cost to be calculated @ 0.5% of the average value of investment, we find that Id. CIT(A) has deleted this disallowance by observing that assessee had made specific disallowance of Rs.30,347/-, that dividend income of Rs.8,19,154/- assessee has reinvested Rs.3,26,406/- in the units of mutual funds and no satisfaction of the Assessing Officer in the assessment order as well as no finding that the assessee has incurred more than Rs.30,347/- 12. We observe that the third limb of the rule -8D of the Rules r.w.s. sec.14A of the Act has been brought into effect to cope up with situation where an assessee in the due course of running business makes huge investment in shares and mutual funds for earning exempt income in the form of dividend and long term capital

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gain as well as short term capital gain subject to special rates. Certainly assessee has not specifically booked any expenditure towards administrative cost of huge investment in shares and mutual funds but one cannot ignore the cost of time used by various staff members as well as officers at the helm of affairs who are required to give sufficient energy to select various scrips and mutual funds and to invest into, selling off or switching off of the investments between various mutual funds arranging of funds out of the already invested funds as well as other services including idle business funds for use of banking services for the specific movement of funds round the year and more importantly towards safeguarding the investments against any possible losses. These all activities involve elements of cost of the company which being not calculable in general, are thus taken care of by third limb of Rule 8-D of the Rules r.w.s. 14A of the Act. 13. We further find that Id. CIT(A) in his order deleting the impugned addition has observed that out of the dividend income of Rs.8,19,154/- assessee has reinvested Rs.6,43,206/- and also has observed that long term capital gain of Rs. 14,55,875/- on account of redemption of mutual funds was taxable in nature. Therefore, in the given facts and circumstances of the case we are of the view that as against 0.5% of the average investment of Rs.11.35 crores working out at Rs. 5,67,450/- lump sum disallowance of Rs.2,50,000/- will be justified towards administrative cost incurred on maintaining investment in shares and mutual funds. Accordingly total disallowance of Rs.2,80,347/- (Rs.30,347/- + 2,50,000/-) is held to be disallowance u/s 14A of the Act. Accordingly the ground of Revenue is partly allowed.

18.1 Respectfully following the decision in the assessee’s own case for the immediately preceding assessment year 2009-10, as against disallowance of 0.5% of the average investment, which works out to� 3,22,431/- ,in our view, the disallowance may be restricted to a lump-sum disallowance of � 250,000/-towards administrative cost incurred on maintaining investments in tax free funds.

Now we shall discuss the Departments appeal:

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Ground number 1: deletion of upward adjustment of � 1,83,53,946/- made on international transactions:

Ground number 2: deletion � 1,90,05,000/-made on account of interest expenditure under section 36 (1)(iii) of the Act:

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In view of the above facts, the Ld. CIT(Appeals) allowed the assessee’s appeal, with the following observations:

“On a careful consideration of the entire facts of the case, it is noted that the appellant had sufficient interest-free fund for making the investment and giving the interest-free advances. Further, the decision given by honourable Bombay High Court In the Case of Reliance Utilities [313 ITR 340], would also be applicable on the present set of facts as the interest free funds available with the appellant far exceeds the advances given to the subsidiaries. It is also noted that the interest expenditure that has been incurred by the appellant is of specific nature and it cannot be contended that it is on the funds which have been advanced to the sister concern. The issue of interest expenditure has been discussed by me in the preceding pages while deciding the issue of interest disallowance under section 14A. In view of these facts and circumstances, and also relying on the findings given by my predecessor in A. Y. 2009 - 10, the disallowance made by the AO under section 36(l)(iii) is directed to be deleted. The ground of appeal is accordingly allowed.”

“8. In ground no. 2, the Assessing Officer has raised the following grievance: The learned CIT(A) has erred in law and on facts in deleting the disallowance of Rs 1,90,05,000 made on account of interest expenses under section 36(l)(iii) of the Act without appreciating the fact that once the funds are put into business they lose their identity. 9. So far as this grievance of the Assessing Officer is concerned, the material facts are like this. During the course of assessment proceedings, it was noticed that the assessee has made investments of Rs 15,83,75,000 in various subsidiaries. It was contended that the assessee has sufficient interest free advances to make these investments. The Assessing Officer however brushed aside the plea and proceeded to compute interest @12%, on notional basis, on such interest free advances and allow the interest deduction under section 36(l)(iii) to that extent. Aggrieved, assessee carried the matter in appeal before the CIT(A) and the learned CIT(A),

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following the view taken by him for the assessment year 2009-10, deleted the said disallowance. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 10. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in the matter as learned CIT(A)’s order for the assessment year 2009-10, based on which impugned relief was given, has since been confirmed by a coordinate bench vide order dated 6th September 2016 and the learned Departmental Representative has dispute that material facts of the case are same. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 11. Ground no. 2 is thus dismissed.”

22.1 Respectfully following the decision in the assessee’s own case, which are concurring with the observations made by Ld. CIT(Appeals) in the appellate order as well, we are hereby dismissing the Department’s appeal on this issue.

Grounds of Appeal No. 3 of Department’s appeal: deleting the addition of � 56,35,500/- on account of royalty payment:

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“The appellant on the other hand has submitted that the appellant company had the user right and no ownership is there with it. The payment of royalty was related to the sales made by use of technology supplied by the owner of the trademark. The use of trademark did not create any asset or permanent right in favour of the appellant. The agreement for using of trademark is for only seven years and the appellant has paid annual charges. It has also been pointed out by the appellant that the similar disallowance made in earlier years have been deleted by CIT(A), and honourable IT AT in A. Y. 2005 - 06 has also rejected departmental appeal on the issue. On a careful consideration of entire facts of the case, it is noted that the issue is covered in favour of the appellant by the orders of my predecessor in earlier year. It is also noted that the appellant is paying the Royalty on an annual basis and the same is linked to the sales made during the year. The appellant -has also deducted tax on the royalty payment. It is a recurring expenditure for the year. The appellant has not created any capital asset nor at it acquired any permanent right. In view of these facts and respectfully following the orders of my predecessor CIT(A) in earlier years, the disallowance made by the AO is directed to be deleted. The ground of appeal is accordingly allowed.

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“12. In ground no. 3, the Assessing Officer has raised the following grievance: The learned CIT(A) has erred in law and on facts in deleting the addition of Rs 56,35,500 on account of royalty payment without appreciating the facts that the said payment was made for the use of landmark. 13. So far as this disallowance is concerned, the Assessing officer noted that the assessee has made a royalty payment of Rs 75,10,000, but in the assessment years 2005-06 to 2009-10, the similar payments have been disallowed as capital expenditure. The Assessing Officer also noted that the CIT(A) has, in those years, allowed the claims in appeal but that fact did not impress the Assessing Officer, as he was of the view that the relief so granted by the CIT(A) is under challenge in appeal before the CIT(A). He, in line with the stand taken at the assessment stage in those years, treated the said expenditure as capital expenditure but allowed depreciation @ 25% on the same. The net disallowance was thus made at Rs 56,35,500. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 14. Having heard the rival contentions and having perused the material on record, we no reasons to interfere in the matter as learned CIT(A)'s order for the assessment year 2009-10, based on which impugned relief was given, has since been confirmed by a coordinate bench vide order dated 6th September 2016 and the learned Departmental Representative has not been able to point out any material difference in the facts of the case of the said assessment year vis-a-vis the facts of the case of this year. As a matter of fact, there is no dispute that material facts of the case are same. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 14. Ground no.3 is thus dismissed.

26.1 Respectfully following the decision in the assessee’s own case, which are concurring with the observations made by Ld. CIT(Appeals) in the appellate order as well, we are hereby dismissing the Department’s appeal on this issue.

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Assessment year 2011-12

Department appeal for Assessment Year 2011-12:

Ground number 1: deletion of upward adjustment made on international transactions:

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comparable while computing the ALP in the assessee set of facts, Ground of Appeal No.1 of Department’s appeal would have to be adjudicated based on the outcome of the decision of Ld. CIT(Appeals) and accordingly, the same is not being adjudicated at this stage.

Grounds of Appeal No. 2 of Department’s appeal: deleting the addition of � 62,95,500/- on account of royalty payment:

Grounds of Appeal No. 3: deletion of disallowance of provision for differential warranty expense of � 9,84,733/-

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provision for warranty expenses were made on the basis of past experience. Accordingly, the AO disallowed the same. In appeal, the Ld. CIT(Appeals) allowed the assessee’s appeal with the following observations:

“8.3 The similar issue has been decided by Commissioner (Appeals)-2 in Assessment Year 2010-11 in appeal no. CIT(A)-2/DCIT/Cir.4/100/13-14 vide appellate order dated 13/02/2015. The findings given in said order are reproduced here under:-

"I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made a disallowance of the provision of warranty made by the appellant in the profit and loss account. It has been held by him that the expenses were not crystallised and there was an element of uncertainty in the provision. The appellant on the other hand has submitted that the provision has been made on a systematic and scientific basis. The actual expenditure incurred during the year has been reduced and only the net provision has been made. It is further been pointed out by the appellant that the provision has been made is in accordance with the policies adopted by it in the preceding years. It has further been pointed out by the appellant that the disallowance made in A. Y. 200-10 has been deleted by the CIT(A) in that year.

On a careful consideration of the entire facts of the case it is noted that the appellant has adopted scientific basis for making the provision for warranty. It is further noted that in A. Y. 2009 - 10 and earlier years the CIT(A) has deleted, the disallowance on account of provision of warranty for that year. Since the facts are similar in this year also the disallowance made by the AO is directed to be deleted.

The ground of appeal is accordingly allowed."

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35.1 Respectfully following the judgement of the ITAT in assessee’s own case for assessment year 2005-06 as reproduced above, we find no infirmity in the order of Ld. CIT(Appeals) and we hereby dismiss the Department’s appeal on this issue.

Assessee’s Appeal:

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Department appeal for Assessment Year 2012-13:

Ground number 1: Deletion of upward adjustment made on international transactions:

Ground number 2: deleting disallowance of provision for differential warranty expense of � 20,20,000/-

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Ground number 3: deleting disallowance of education expense amounting to � 35,97,769/-

“7.3 I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed education expenditure on the ground that there is no nexus between business expenditure and profitability and income of the assessee. “7.3.1 The appellant on the other hand has submitted that Mr. Tarak Patel has been appointed as Executive Director from January 30, 2007. He has been granted approval by Board of Directors by Board Resolution dated 28th April,

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2011. Further it was decided that the company will bear 50% of the training programme and Mr. Tarak Patel shall sign an agreement with company that he will work with company for period of 3 years and in case he leaves early he should reimburse the expenses incurred in proportion to the years of services left. This education programrne has given better management skills, work efficiency etc. and which will act the profitability of the company in long time. Considering the indirect personal benefit to the director, the company has already recovered 50% expenditure. Further in case of CIT v. U.P. Asbestos Limited (2012) 83 CCH 0127 (All. HC) it is held that expenditure incurred by the company to send someone for training or higher education and after returning back in pursuance to contractual obligation, such person joins the company itself, then in such circumstances, it may not be treated as expenditure for personal reason because of relationship with an office bearer. Further assessee relied on ACIT v. M/s Mazda Ltd (I.T.A. No. 3190/Ahd/2008) (Ahm. ITAT) & Gujarat Carbon Industries Ltd v. ACIT (I.T.A. No. 3231/Ahd/2010) (Ahm. ITAT) which is in favour of assessee and cited by the appellant in its submission. : On a careful consideration of entire facts of the case, it is noted that the issue is covered in favour of the appellant. The amount of Rs. 35,97,769/- claimed by the assessee as education expenditure is an allowable expenditure. The disallowance made by the AO is directed to be deleted. The ground of appeal is accordingly, allowed.”

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where daughter of managing director of assessee-company which was running a hospital was sent abroad for acquiring specialised knowledge in medical field and after acquiring same, she was working with assessee, expenses incurred towards daughter's education were to be allowed under section 37(1) of the Act. In the case of Ras Information Technologies (P.) Ltd.[2011] 12 taxmann.com 158 (Karnataka), the High Court held that money spent by an assessee either in sponsoring a student or towards educational expenses of a student in a discipline, in which assessee is carrying on its business, is a valid expenditure and is entitled to deduction. In the case of Kostub Investment Ltd.[2014] 45 taxmann.com 123 (Delhi), the High Court held that where expenditure on higher education of employee had an intimate and direct connection with assessee's business, it would be appropriately deductible, even though such an employee was son of a Director. In the case of Aswathanarayana & Eswara [2018] 97 taxmann.com 572 (Madras), the High Court held that expenditure by firm on partner's foreign education was to be allowed when post graduate course underwent was directly related to profession carried on by firm. In view of the above decisions and in light of the order passed by Ld. CIT(Appeals), we are of the considered view that in the instant set of facts, Ld. CIT(Appeals) has not erred in facts and in law in deleting the additions made by the AO, considering the facts of the present case.

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Order pronounced in the open court on 29-11-2022

Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 29/11/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद