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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI A.T. Varkey, JM & Dr.A.L.Saini, AM
Per Dr. Arjun Lal Saini, AM: The captioned two appeals filed by the Revenue, pertaining to assessment years200203 &200304, are directed against the separate orders passed by the Commissioner of Incometax (Appeals)22, Kolkata in Appeal Nos.196 and 197/CIT(A)22/034/1415/Kol, which in turn arise out of fair assessment orders passed by the Assessing Officer u/s. 143(3) r.w.s 144C of the IncomeTax Act, 1961 (in short, the Act).
Since these two appeals filed by the Revenue pertain to same assessee, identical issues are involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
However, in these appeals, the Revenue has raised multiple grounds of appeal, but at the time of hearing, we have carefully perused all the grounds raised by the
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Revenue. Most of the grounds raised by the Revenue, are either academic in nature or contentious in nature. However, to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of the Revenue. With this background, we summarize and concise the grounds raised by the Revenue as follows:
Transfer Pricing Grounds
(i).Ld.CIT (A) erred in deleting following additions made on account of Transfer Pricing adjustments by ignoring analysis done by Transfer Pricing Officer (TPO): (a).Arm`s Length Price adjustment for A.Y.200203 at Rs. 5,19,77,000/ (b).Arm`s Length Price adjustment for A.Y.200304 at Rs. 10,02,37,000/
Other Grounds
(i).Ld CIT(A) erred in deleting provision for payment of gratuity under section 40A(7) of the Act and addition made on account of contribution to superannuation fund U/s 40A(9) of The Act. (a). Provision for gratuity u/s 40A(7), for A.Y.200203 Rs.8,28,600/ (b). Provision for gratuity u/s 40A(7), for A.Y.200304 Rs.20,71,870/ (c ).Contribution to Superannuation Fund U/s 40A (9), for A.Y. 200203 Rs.14,75,778/ (d).Contribution to Superannuation Fund U/s 40A (9), for A.Y. 200304 Rs. 5,47,224/
(ii).Ld CIT(A) erred in deleting the addition made on account of provision for tax at Rs.7,50,000/. This ground is raised by Revenue in A.Y.200203.
(iii). Ground Nos. 6, 7, 8, and 9 raised by the Revenue are interlinked and common. These grounds relate to computation of deduction under section 80HHC of the Act. The main grievance of the Revenue in these grounds are that CIT(A) was erred in directing the AO to consider foreign exchange gain as a part of export turnover, while such gains were not derived out of export activity and were not earned in convertible
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foreign exchange. The CIT(A) was also erred in allowing cross currency swap and miscellaneous income as part of profit to compute deduction u/s 80HHC and reduce sales tax from total turnover. These grounds are raised by Revenue in A.Y.200203.
(iv). Ground Nos. 3 and 4 raised by the Revenue for A.Y.200304 relate to addition deleted by the ldCIT(A) under section 40(a) (ia) of the Act by accepting fresh evidence in violation of provisions of Rule 46A of the I.T. Rules.
(v). Ground Nos. 7 and 8 raised by the Revenue for A.Y.200304 relate to addition deleted by the ld CIT(A) under section 43B of the Act in respect to payment of interest on term loan under section 43B of the Act in violation of provisions of Rule 46A of the I.T. Rules.
4.We shall first take-up additions deleted by ld CIT(A) on account of Transfer Pricing Adjustment. The above summarized and concise grounds relating to transfer pricing adjustmentsare given below for ready reference:
Transfer Pricing Grounds
(i).Ld.CIT (A) erred in deleting following additions made on account of Transfer Pricing adjustments by ignoring analysis done by Transfer Pricing Officer (TPO): (a).Arm`s Length Price adjustment for A.Y.200203 at Rs. 5,19,77,000/ (b).Arm`s Length Price adjustment for A.Y.200304 at Rs. 10,02,37,000/ Note: To adjudicate the transfer pricing issue, we take the lead case for for A.Y.200304
The brief facts qua the issue of transfer pricing adjustments are that, assessee is a private limited company, by name EPCOS India Private Limited and formerly it was known as 'EPCOS Ferrites Ltd. The assessee company,‘EPCOS India Private Limited, is a subsidiary of EPCOS AG, Germany (EPCOS AG). The
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assessee company is inter alia engaged in the business of manufacture and sale of electronic component, namely, soft ferrites components. The soft ferrite components are widely used in entertainment electronics, telecommunication and industrial electronics industries.The assessee company filed its return of income for the assessment year 200304 on 28112003 declaring a loss to the tune of Rs. 15,35,09,431/. The determination of arm's length price of the international transactions was referred to the Ld. Transfer Pricing Officer (hereinafter referred to as the 'TPO') under section 92CA of the Act. The TPO directed following arm's length price (ALP) adjustments, under the Transactional Net Margin Method (TNMM') at the entity level, as under:
(a).Arm`s Length Price adjustment for A.Y.200203 at Rs. 5,19,77,000/ (b).Arm`s Length Price adjustment for A.Y.200304 at Rs. 10,02,37,000/
The assessee company entered into the following international transactions with its associated enterprises during the financial year ended 31st March, 2003:
A.Import of raw materials, INR 5.65 Crores. B.Import of tools and capital equipment, INR 3.84 Crore. C.Payment, for service chargefor IT services, sales support, marketing and advertisement and sorting services INR 5.05 crore. D. Export of tools, INR 0.13 crore. E. Export of finished goods, INR 45.83 crore. F. Payment for technical knowhow, royalty, INR 0.79 Crore. G. Interest paid on corporate loan, INR 0.14 Crore.
For Item nos. A, B, C and D (grouped as manufacturing function), Transactional Net Margin Method (TNMM) was selected by the assessee as the most appropriate method for determination of arm's length price. For Item no. E, that is, export of finished goods to theAssociated Enterprise, the assessee has followed Comparable Uncontrolled Price (CUP)method for determining arm's length price. For payment of
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royalty (Item no. F),the RBI's approval has been considered as appropriate benchmark for determination of arm's length price.
For Item no. E, that is, export of finished goods to theAssociated Enterprise, the assessee has followed Comparable Uncontrolled Price (CUP)method for determining arm's length price. The export sales of the assessee comprise of sales to EPCOS Group entities or to the unrelated parties specified by EPCOS Group entities. EPCOS Group entities sold the products to unrelated third parties at the same price at which they are procured from the assessee. As per EPCOS group policy, manufacturing entities receive the end price realized by the customer after leaving a small profit to the sales organizations. In other words, sales organizations make a small profit on handling the sales of manufacturing group companies after covering their cost of sales viz. logistics cost, overhead, cost of inventory etc. Thus, the assessee being a manufacturing entity receives the end price realized from the customer. EPCOS Group entities have also confirmed that ferrites were sold to unrelated third parties at the same price at which they were procured from the assessee. The confirmatory email was produced to the Ld. TPO,in support of the assessee's claim. In view of the facts and circumstances in respect of export of finished goods by the assessee to EPCOS Group entities, CUP method was considered as the most appropriate method. CUP method is applicable where Associated Enterprises buy or sell similar goods or services in comparable transaction with unrelated enterprises or when unrelated enterprises buy or sell similar goods or services, as is being done between Associated Enterprises. According to the OECD guidelines where it is possible to locate comparable uncontrolled transaction, CUP method is the most direct and reliable way to apply the arm's length principle. As a result,in such cases the CUP method is preferable over all other methods. Accordingly, the assessee applied the CUP method for determining the arm's length price of export of finished goods to its associated enterprises. However, the TPO rejected CUP as the most appropriate method to determine the arm's length price of export of finished goods to associated enterprises.The Ld.TPOalso rejected the RBI approval as benchmark to determine the ALP for payment of knowhew fees and
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considering TNMM as the most appropriate method for determining the ALP for technical knowhow fees/royalties.
Selection of comparable companies by assessee:The assessee carried outobjective search process in the Prowess database to identify independent comparablecompanies, whose functional profile was broadly comparable to that of the assesseecompany. The search wascarried out under the heading "electronics" in such database since the assesseeis engagedin manufacture of electronic components. This search gave an initial set of 772 companies. From such set, 163 companies were excluded for nonavailability of financial data,thereafter, 73 companies were excluded because sales were below Rs. 50 lakhs. Thereafter, companies for which manufacturing sales was less than 75% of total sales, were excluded, because assesseeis engaged in manufacturing activity. Out of 198 remaining companies, 184 companies were excluded, because these companies' products/services were found to be different from those of assessee.Thus, 14 broadly comparable independent companies were identified for the purpose of determination of ALP as per TNMM. The 14 companies selected for testing of comparable data are broadly engaged in manufacturing of electronic components. The assessee company is also engaged in the manufacture of electronic components. However, the Ld. TPO considered only 2 companies out of the total 14 companies selected by the assessee as closely comparable companies. The Ld. TPO concluded that the following two companies are only comparable to the Assessee's function for benchmarking its international transactions:
(1).Continental Devices India Ltd.; and
(2).Cosmos Ferrites Ltd.
The anothergrievance of the assessee, before the TPO was that the Ld. TPO consideredsingle year data and not considered multiple year data for computing the margins earned by the comparable companies selected by the TPO and the assessee's margin. As per Rule 10B(4), the use of the data relating to the financial year in which the international transaction has been entered into is mandatory as per proviso to Rule 6 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
10B(4), the data for two earlier years can also be used, if such data reveals facts which could have an influence on the determination of transfer price in relation to the transaction being compared.The purpose of using multiple year data is to ensure that the outcomes for the relevant year are not duly influenced by abnormal factors, in determining arm's length outcome for international dealings between associated enterprises, the result of anyone year may be distorted by difference in economic or market conditions and the features and operation of the enterprise affecting the controlled and uncontrolled dealings. It may be noted that the participants in an industry may not be uniformly affected by business and products cycles and therefore, difference between dealings may reflect differencein circumstances, not the effect of nonarm's length dealings. This approach of usingmultiple year data is consistent with the OECD guidelines on transfer price. According to the Para 3.44 of OECD guidelines, multiple year data should be considered in the TNMM for both the enterprise under examination and independent enterprises to the extent their net margin are being compared to take into account the effects on profits of products life cycles and shortterm economic condition.This also evident from the facts in the case of the assessee company. The Assesseecompanyincurred operating losses during the financial year ended 31 March 2003, due to change in economic and market conditions. There was a fall in the market of telecom business. As a result, the ferrite manufacturers shiftedtheir capacities from telecom sectors the electronic and lighting sectors.Assessee caters to the electronics and lighting sector. As a fall out, within a short period the activities for ferrites cores catering the lighting and electronic sector shot up significantly causing a price war, which adversely affected the profitability of assesseeduring the year under consideration. Therefore, the assessee was of the view that the ld TPO erred in considering single year date for determining the ALP without considering the factthat the use of single year data may be distorted by difference in economic or market conditions.
8.Proceedings before Transfer Pricing officer:During the course TPO proceedings under section 92CA (3) of the Incometax Act, 1961, the TPO had examined the ‘Transfer pricing study report’(TPSR) of the assessee company and the functional
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profiles of the fourteen comparable companies selected by the assesseecompany. The TPO retained only two comparable companies named Cosmo Ferrites Ltd and Continental Devices India Ltd. The TPO rejected the remaining twelve comparable companies primarily based on product comparability. The ld TPO noted that assessee had entered into following international transactions:
A. Import of raw materials, Rs. 5,65,64,184/ B. Import of tools and capital equipment, Rs.3,84,57,470/ C. Payment, for service chargefor IT services, sales support, marketing and advertisement and sorting services, Rs.5,05,74,785/ D. Export of tools, Rs.13,04,115/ E. Export of finished goods, Rs.45,83,01,658/ F. Payment for technical knowhow, royalty,Rs.79,34,650/ G. Interest paid on corporate loan, Rs.14,43,868/
In the Transfer Pricing Study Report (TPSR) prepared by the assessee, these transactions have been justified by dividing them in to four different categories:
(1).Foritem nos. A, B, C and D (grouped as manufacturing function), Transactional Net Margin Method (TNMM) was selected by the assessee as the most appropriate method for determination of arm's length price. It is stated in the TP report that the assessee had earned an average of 13.13% net profit for the financial year 200001, 200102, and 200203 which is in line with net profit margins of the comparable enterprises. It is thus claimed that all these transactions may be accepted as at arm`s length.
(2). For item no. E, that is, export of finished goods to theAssociated Enterprise, the assessee has followed Comparable Uncontrolled Price (CUP)method for determining arm's length price.
(3). For payment of royalty (Item no. F),the RBI's approval has been considered as appropriate benchmark for determination of arm's length price.
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(4).For item No. G above,Interest paid on corporate loan,the RBI's approval has been considered as appropriate benchmark for determination of arm's length price.
However, the ld TPO rejected the most appropriate method (MAM) adopted by the assessee and held as follows:
(a). Application of comparable uncontrolled price method (CUP) in respect of export of soft ferrites to Associated enterprises (AE) is not acceptable in absence of any verifiable data. Even auditors of the assessee who prepared the transfer pricing report have not verified any data in this regard. Even during the proceedings, U/s 92CA (2) of the Act, the assessee did not provide evidence to support their claim that the goods sold by the assessee to its AE were then sold at the same price to the third party without any markup. Therefore, Ld TPO held that it is imperative to consider the transactions of export of soft ferrites under the last resort method of TNMM.
(b).For payment of royalty, the ld TPO noted that mere approval of RBI is not an acceptable method therefore, TNMM method is suitable for determination of ALP of Royalty transaction.
(c ). For Intercorporate loan, the TPO noted that mere approval of RBI is not an acceptable method therefore, TPO recommended CUP method.
The disputed issue in this appeal is in relation to item No.E mentioned above, that is, export of finished goods, Rs.45,83,01,658/. During the TPO proceedings, the ld TPO noted that the contention of the Assessee, that since he had earned an average of 13.13% net profit for the F.Ys. 200001, 200102and 200203 which more than the net profit margins of the comparable enterprises of 6.96%, as determined by their auditorsin the transfer pricing report, all international transactions are at an arm's length is not acceptable. During the year under consideration assesseecompany had incurred an operating loss of 6.7% which was completely out of sync with the operating profit margin of the comparable enterprises. Two issues arise at this stage. Firstwhether the profitability of the assessee company for the years other than the 9 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
relevant previous year should be considered for application of TNMM? The ld TPO addressed these issues as follows: (i). Section 92 requires that "Any income arising from an international transaction shallbe computed having regard to the arm's length price." And, the income that is chargeable to Incometax under the head "Profits and gains of business or profession", u/s 28 is the "Profit and gains of business or professionwhich was carried on by the assessee at any time during the previous year."It is thus clear that while ascertaining income of the assessee u/s 92 by application of the arm's length principle, only the results of the previous year are relevant. Therefore, results of the relevant previous year (FY 200203) only shall be considered for application of TNMM in the present case.
(ii). Coming to the data of comparable enterprises, the data relevant for comparison is that of year ending March 2003, which is the relevant previous year for the assessee company. As per Rule 10B of the I.T. Rules, relevant year's financial data is to be used for the purpose of computation of arm's length price u/s 92C of the I.T. Act. Rule 10B(iv) lays down the following :
"The data to be used inanalysing the comparability of an uncontrolled transaction with an International transaction shall be the data relating to the financial year. In which the international transaction has been entered Into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered,if such data reveals facts which could have an influence on the determination of transfer pricesin relation to the transactions being compared.” It is evident that for determination of Arm's Length Price u/s 92C, the data to be used in analysing the comparability of an uncontrolled transaction with the International transaction, in general, has to be the data relating to the FY in which the International transaction was entered Into. A distinction needs to be drawn between data to be used for computation of arm's length price (Section 92C/Rule 10B) and the data used for supporting documentation maintained by the assessee (Section 92D/ Rule 10D). For the purpose of documentation, assessee can use data which is existing latest by the specified date referred to in Clause IV of Section 92F i.e. by due date of filing the
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return for that year i.e. by 31st October 2002. However, for the purpose of computing the arm's length price u/s 92C, as clearly laid down in Rule 10B (4), same year's data to be used. Under the law, there is a responsibility cast upon the assessee to maintain documentation as per section 92D/Rule 10D. This must be done before filing of return of Income. At the time of preparation of documentation, results of the financial year which has just ended, may not yet be available on prowess or other databases. Thus, for the purpose of documentation u/s 92D, use of earlier year's data is allowed. However, this does not and cannot come in the way of determination of Arm's Length Price (ALP) u/s 92C using relevant year's data, If the same is now available. Thus, the determination of Arm's Length Price shall be done in this order using the audited financial results for FY 200203.
Then after, ld TPO proceeded for selection of companies to determine the arm`s length price.The TPO noted that during the previous year 200203, assessee Company incurred operating loss of 6.7%. This was compared to the enterprises engaged in similar business as seen from clinic database. Following selection sequence was adopted:
INDUSTRY»FACT SHEET» Manufacturing » Engineering » Electronics>> Ferrites>>SoftFerrites
Selection 12533 All Companies 5570 Manufacturing 1056 Engineering 174 Electronics 6 Ferrites 3 SoftFerrites 1 Turnover > 10 crores for year end March 2002 Selected companies Cosmo Ferrites
The TPO asked the assessee to explain why 'Cosmo Ferrites'should not be taken as a comparable while applying TNMM.
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In response, the assessee submitted that assessee company has selected 14 functionally comparable companies, as being comparable to itselfunder TNMM based on international guidance provided by the OECD and other international laws and commentaries for use of TNMM. In contrast to the approach followed by the assessee, selection of Cosmo Ferrites Limited as only Comparable company based on product similarity should not be made. The selection of Cosmo ferrites only under TNMM only on the basis of products similarity and without adhering to international guidance provided by the OECD and US Transfer Pricing Regulations would be erroneous.
11.The ld TPO then examined the contention of assessee in respect of 14 companies selected as comparable in the TP report. These comparable companies were analyzed by TPO as follows:
(1)SanmarMicropak Ltd
This company's turnover is less than one tenth of assessee's turnover. It manufactures printed circuit boards at a very small scale level. Neither the product mix nor the size of this company can be compared with the assessee company.
(2). Karnataka Hybrid Devices Ltd
This company manufactures electrical equipment and the assessee company manufactures raw material for the electronics Industry. The activities performed by both are completely different. Moreover, the turnover of this company at 7 crores is significantly less than the assessee company. It cannot be compared with the assessee company.
(3). SPEL SemiconductorsLtd .
This company is in the business of manufacture of computer and related hardware. This isonce again a consumer of ferrite based electronic components whereas the assesse is aproducer/manufacturer of ferrite components. It cannot be compared with the assessee company.
(4) Fine Line Circuits 12 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
This company manufactures printed circuit boards. The product mix is not comparable with the assessee company.
(5) Pan Electronics (I) Ltd
This company manufacturescapacitors using mainly Polyester Film as raw material. The product mix is not comparable with the assessee company. Also, at about 5 crores of turnoverit is a much smaller entity than the assessee company.
(6).Ruttonsha International Rectifier Ltd.
This company manufactures power rectifiers. Instead of producer of ferrite based electronic components,it is a consumer only. The turnover is also less than one tenth of assessee'stumover. It cannot be compared with the assessee company.
(7). Anand Electronics & Industries Ltd.
This company's turnover is less than one tenth of assessee's turnover. It manufactures printed circuit boards at a very small scale level. Neither the product mix nor the size of this company can be compared with the assessee company.
(8)Keltron Component Complex Ltd
This company manufactures AluminumElectrolyticCapacitors, which are completely different from the soft ferrite based components. The product mix is not comparable with the assessee company.
(9)Deltron Ltd
This company manufactures televisions and EPABX boards and other electronic sub assemblies. The product mix is not comparable with the assessee company.
(10). CTR Manufacturing Inds Ltd.
This company produces plastic film capacitors and radiator tap changers. The product mix is not comparable with the assessee company.
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(11).Incap Ltd.
This company manufactures Alumlnum Electrolytic capacitors, which are completely different from the soft ferrite based components. The product mix is not comparable with the assessee company.
(12). Akasaka ElectronIcs Ltd
This company manufactures printed circuIt boards. The product mix is not comparable with the assessee company.
(13) Continental Devices India Ltd.
This company is into the manufacture of electronic components which are broadly similar to the assessee company. The turnover is also comparable. This company can be selected as a possible comparable.
(14) Cosmo Ferrites Ltd
This company manufactures soft ferrite based electronic components and its turnover isalso comparable to that of the assessee company. It is the closest comparable to the assessee company.
Thus, TPO noted that out of 14 companies which were considered in the transfer pricing report by the assessee, only two can be taken as valid comparison for the assesse company. Other companies differ either because of incomplete turnover or in some cases the product mix is completely different. And alsoincomparable turnover and incomparable product mix signify incomparable economic circumstance in which the enterprises operate.
The ld TPO noted that the size of an enterprise is an important factor in determining comparability. Size as reflected by turnover, determines 'relative competitive positions by buyers and sellers' and is thus a significant economic condition which could affect prices or profitability. Similarly, the TPO noted that the product comparability also play no less a significant part in determining whether an
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enterprise can be considered for comparison. The ld TPO, based on the above observations noted that the closest comparable Companies are M/s Continental Devices India Ltd. and M/s Cosmo Ferrite Ltd. Therefore, the results of these two companies only can be compared with the results of the assessee company. For the same period (Year Ended March 2002) results of these two companies are compared with the assessee company as below:
Rs. in Crores EPCOS ContinentalDevics Cosmo Ferrite Ltd. India Ltd Ferrite Ltd (Assessee Co.) Income Sales 53.13 97.12 26.90 Other Income 3.48 3.54 0.54 (A).Total Income 56.61 100.66 27.44 Expenditure Excise duty 1.49 Material cost and change in 16.70 inventory
Personnel Costs 7.50 87.33 19.34 Other Costs 27.87 Depreciation 8.32 (B) Total Costs 60.40 91.5 24.25 ( C ).Operating Profit before tax 9.61 9.61 6.06 Operating Profit Margin on 16.11% 19.93% Sales [C/A] Operating Profit Margin on 19.20% 24.89% Total Cost [ C/B] Average arm’s length OP/Sales 10.36% Average arm’s length OP/Costs 11.56%
The arm’s length operating profit margins are therefore taken as 10.36% on sales and 11.56% on costs.
In assessee’s case both sides of Profit and Loss account are affected by the associated party transactions, viz. on debit side the AE transactions are that of purchases and payment of service fees and technical fee etc and on credit side it is exports of the AE. Interest payment, since it has been held to be at an arm’s length is now considered as
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an unrelated party transaction requiring no adjustment. Accordingly, following transactions were considered for transfer pricing adjustments:
Rs. Cost side of Import of raw 5,65,64,184 Profit& Loss A/c material Import of spares, 3,84,57,470 15,35,31,089 tools and capital equipment Payment of service 5,05,74,785 charges for IT services, sales support, marketing & advertisement and sorting services Payment for 79,34,650 technical knowhow (Royalty) Income side of Sale of tools 13,04,115 Profit& Loss A/c Export of finished 45,83,01,658 45,96,05,773 goods
The Associated Enterprise related transactions on debit side are only 15.35 crores out of total costs of 61.99 crores (i.e 24%) whereas those on the credit side amount to 45.96 crores out of 58.2 crores of total income (i.e 78%). Therefore, for sake of simplicity and least distortions, first the AE transactions on the debit side are assumed as at arm’s length and after adjusting the AE related sales transactions credit side valueswill be used to adjust cost related AE transactions, in the following manner:
Reference Rs. In ‘000’ Arm’s length Operating As Discussed 10.36% Profit Margin on Sales A Total Cost (excluding interest TP Report page 29 6,04,060 expense) as claimed B Arm’s length OP/Cost ratio As Discussed 11.56% C Adjusted Profit A x B 69,813 D Adjusted total income on credit A+C 6,73,873 side E Total income shown on credit TP Report page 22 5,66,117 side F Value of AE transactions 3CEB report 4,59,605 (exports) G Third party transactions on EF 1,06,512 1,06,512 credit side H Adjusted value of AE DG 5,67,361 transactions (exports) 16 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
I 95% of Adjusted value of AE H x 95% 5,38,993 transactions (exports) J Total adjusted income after I + G 6,45,505 tolerance of 5% K OP/Sales 10.36% L ReAdjusted Profits J x K 66,874 M Adjusted Costs JL 5,78,631 N Costs shown on debit side TP Report page 29 6,04,060 O Value of AE transactions as 3CEB report 1,17,041 claimed (Excluding capital costs and interest) P Third party transactions on costs NO 4,87,019 4,87,019 side Q Adjusted value of AE MP 91,612 transaction on costs side R 105 % of Adjusted value of AE Q x 105% 96,192 transaction on costs side S Adjustment on account of IF 79,388 exports to AE T Adjustment on account OR 20,849 of costs incurred on transactions with AE U Total adjustment S+T 1,00,237
As per the calculation shown in the table above, the ld TPO made an arm`s length price adjustment to the tune of Rs.10,02,37,000/ and added to the total income of the assessee as transfer pricing adjustment.
Aggrieved by the order of the ld TPO/AO, the assessee carried the matter in appeal before the ld CIT(A), with success.The ld CIT(A) approved the use of cash profit margin by the assessee for placing the tested party and the comparable companies on equal footing. The CIT(A) noted that the assessee has demonstrated that the cash profit margin of the assessee was 8% (approximately), whereas the arithmetic mean of the cash profit margins of the aforesaid nine comparable companies stands at 12.41%. It is noted that the net profit margin of the tested party was ()6.70%, whereas the cash profit margin of the tested party stood 8% thereby indicating that the loss was caused by a considerable increase in provision for depreciation. The ld CIT(A) was of view that the assessee was justified in applying cash profit margin as more appropriate financial indicator (PLI) than net profit margin. The assessee has further demonstrated before the ld CIT(A) that the international transactions entered into by the assessee with its associated enterprises are at arm's length by applying the +5% arm's length range as laid down in proviso to subsection (2) of section 92C of the Incometax Act, 17 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
1961. The ld CIT(A) accepted the arm's length analysis submitted by the assessee using cash profit margin as the appropriate net profit Indicator and therefore he deleted the ALP adjustment of Rs.l0,02,37,000/.
Aggrieved by the order of ld CIT(A), the assessee is in appeal before us.
The ld DR for the Revenue submitted before us that assessee has used the cash method to compute the profit level indicator (PLI) which is not accepted in Indian transfer pricing scenario, therefore, the transfer pricing adjustment done by ld TPO should be upheld. The ld DR pointed out that ld CIT(A) contradicted the TNMM method followed by the TPO. The ld CIT(A) also ignored the analysis done by the TPO for making transfer pricing adjustment. The ld DR also pointed out that TPO selected only two comparable companies, whereas Ld CIT(A) selected 9 more comparable companies. In 9 comparable companies so selected, the product differentiation has not been taken into account by the ld CIT(A). The ld DR also objected the profit level indicator (PLI) taken by the assessee based on net profit.Ld DR further pointed out that for determination of Arm's Length Price u/s 92C, the data to be used in analysing the comparability of an uncontrolled transaction with the International transaction, in general, has to be the data relating to the FY in which the International transaction was entered Into. A distinction needs to be drawn between data to be used for computation of arm's length price (Section 92C/Rule 10B) and the data used for supporting documentation maintained by the assessee (Section 92D/ Rule 10D). For the purpose of documentation, assessee can use data which is existing latest by the specified date referred to in Clause IV of Section 92F i.e. by due date of filing the return for that year i.e. by 31st October 2002. However, for the purpose of computing the arm's length price u/s 92C, as clearly laid down in Rule 10B (4), same year's data to be used. The ld TPO rightly noted that the size of an enterprise is an important factor in determining comparability. Size as reflected by turnover, determines 'relative competitive positions by buyers and sellers' and is thus a significant economic condition which could affect prices or profitability. Similarly, the TPO noted that the product comparability also play no less a significant part in determining whether an enterprise can be considered for comparison. The ld TPO, 18 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
based on the above observations rightly noted that the closest comparable Companies are M/s Continental Devices India Ltd. and M/s Cosmo Ferrite Ltd.Therefore, the results of these two companies only can be compared with the results of the assessee company and analysis done by the ld CIT(A) should be rejected and ALP computed by the TPO should be upheld.
On the other hand, MS. Rituparna Sinha, ld Counsel for the assessee begins by pointing out that the assessee company was into the business of manufacture and supply of electronic components namely 'soft ferrite components' pertaining to electronic industry. The assessee company entered into the international transactions with its associated enterprises during the financial year ended 31st March, 2003 and the dispute is in respect of export of finished goods to the tune of Rs.45,83,01,658/. As disclosed in the Transfer Pricing Study Report (TPSR'), the average net profit indicator (operating profit margin on sales) of the assessee company for three financial years (FY 200001, FY 200102 and FY 200203) stood at 13.13%, whereas the arithmetic mean of the net profit indicators (operating profit margin on sales) for the comparable companies stood at 6.96% (weighted average for three years). Based on this analysis, the assessee company concluded that the international transactions entered into by it with its associated enterprises were at arm's length.The assessee company earned a net profit indicator of () 6.70% for the financial year ending 31st March, 2003. The assessee company's net profit indicator was primarily impacted by the factors discussed below:
• Due to downfall in the telecommunication business, the ferrite manufacturers in India shifted their capacities from telecommunication cores to the 'electronic & lighting sector, to which the assessee company catered. As a fallout, within a short period, the capacities for ferrite cores catering to the lighting and electronic sector shot up significantly causing a price war, which adversely affected the profitability of the assessee company. The turnover of the assessee company dropped by a sum of INR 16.80 crore over last two financial years. • It is pertinent to note that the assessee company was a pricetaker in the international market in respect of sale of finished goods to its associated enterprises. The EPCOS
19 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
group entities imported finished goods from the assessee company for further sale to unrelated customers in the international market at the same prices. Hence, the selling prices of finished goods were entirely governed by the demand and supply forces in the international market and the same were not within the control of the assessee company. During the course of hearing under section 92CA (3) of the of the Incometax Act, 1961, the TPO had examined the TPSR and the functional profiles of the fourteen comparable companies selected by the assessee company. He retained only two comparable companies named Cosmo Ferrites Ltd and Continental Devices India Ltd. The TPO rejected the remaining twelve comparable companies primarily based on product comparability. As per the computation of the TPO, the net profit indicator (OP/sales) for the assessee company was ()6.70%, whereas the arithmetic mean of the same for Cosmo Ferrite Ltd and Continental Devices India Ltd stood at 10.36%. The TPO further computed the net profit indicator (OP/Cost) for the assessee company at 11.56% and the arithmetic mean of the same for the aforesaid comparable companies stood at ()6.27%. The TPO made an overall adjustment of INR 10,02,37,000/ in his order under the TNMM.
MS. Rituparna Sinha, further pointed out aboutselection of Comparable Companies under the TNMM method.In the instant case, the dispute relates to selection of comparable companies made by the assessee company under the TNMM as documented in the Transfer Pricing Study Report. Out of the fourteen comparable companies selected by the assessee company,the TPO retained only two companies and rejected twelve companies. The ld. CIT(A) selected the following nine companies as comparables (including the comparable companies retained by the TPO):
Table No.1- Comparable Companies selected by ld. CIT(A)
20 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
It is pertinent to note that the TPO rejected seven companies i.e. serial no. (1) and serial no. (4) to (9)] mentioned in table no. (1) hereinabove, primarily based on product comparison. The TPO accepted Cosmo Ferrites Ltd as comparable as the company manufactured the same product as that manufactured by the assessee company. However, the product mix of Continental Devices India Ltd was broadly comparable to that of the assessee company. In the assessee`s case, the comparable companies demonstrated in table No. (1) manufactured and sold electronic components and hence, the said companies were functionally comparable to the assessee company. Unlike the CUP Method, the TNMM does not require that the comparable company has to manufacture exactly the same product as that manufactured by the tested party. Hence, the TPO, while adopting the TNMM, erroneously rejected the aforesaid seven companies mentioned in table no. (1) based on product comparison between the assessee company (tested party) and the aforesaid 21 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
independent companies. In this context, the ld Counsel relied on the decision of the Hon'ble Mumbai Tribunal in the matter of DCIT vs. Rolls Royce Marine India (P.) Ltd reported In [2016] 70 taxmann.com 245 (Mumbal Trib.), wherein it is interalia held that in the TNMM what is to be seen is functional comparability and not the product comparability. Therefore, ld counsel prayed the Bench to accept the aforesaid independent companies as comparable to the assessee and order of ld CIT(A) should be upheld.
We have given a careful consideration to the rival submissions and perused the material available on record. First of all, we address the main grievance of the ld DR for the Revenue which is about selection of nine comparable companies by the ld CIT(A). We note thatso far,the dispute for selection of comparable companies made by the assessee company is concerned,we note that out of the fourteen comparable companies selected by the assessee company, the TPO retained only two companies and rejected twelve companies. The TPO by using the TNMM and two comparable companies made ALP adjustment to the tune of Rs.10,02,37,000/. On appeal by the assessee, the ld. CIT(A) selected nine companies as comparables (including the comparable companies retained by the TPO and deleted the ALP adjustment. The list of comparable companies selected by the ld CIT(A) is given below for ready reference:
22 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
Table No.1- Comparable Companies selected by ld. CIT(A)
We note that the TPO rejected seven companies i.e. serial no. (1) and serial no. (4) to (9)] mentioned in table no. (1) hereinabove, primarily based on product comparison. The TPO accepted Cosmo Ferrites Ltd as comparable as the company manufactured the same product as that manufactured by the assessee company. However, the product mix of Continental Devices India Ltd was broadly comparable to that of the assessee company. The comparable companies demonstrated in table No. (1) manufactured and sold electronic components and hence, the said companies were functionally comparable to the assessee company. Unlike the CUP Method, the TNMM does not require that the comparable company has to manufacture exactly the same product as that manufactured by the tested party. Hence, the TPO, while adopting the TNMM, erroneously rejected the aforesaid seven companies mentioned 23 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
in table no. (1) based on product comparison between the assessee company (tested party) and the aforesaid independent companies. In the TNMM,what is to be seen is functional comparability and not the product comparability.The learned TPO ignored the comparability criterion laid down for application of TNMM.For that we rely on the judgment of the Hon`ble High court of Mumbai in the case of Watson Pharma Pvt.Ltd (2018) 95 Taxmann.com 281 (Bom) wherein it was held that TNMM requires only broad functional comparability between the tested party and comparable companies. Hence, we do not accept the contention of the ld DR for the revenue and we accept the nine comparable companies selected by the ld CIT(A).
Now we address the another grievance of the ld DR for the Revenue, which relates to selection of 'Cash Profit Margin' as net profit indicator (PLI) under the TNMM. We note that the assessee before the first appellate authority,selected the 'cash profit margin on sale' as the most appropriate net profit indicator (PLI) under TNMM in the instant case primarily on account of the following reasons: (i).The use of 'cash profit margin on sales' as net profit indicator eliminates the impact on profitability of differences in the technology, age of assets used in production, differences in capacity utilization and the different depreciation policies adopted by different companies.
(ii). The assessee company increased its capacity substantially from 2900 MT in.' FY 200102 to 3400 MT in FY 200203 (i.e. 17.24 percent increase in capacity level).
(iii).The provision for depreciation increased significantly from INR 70,693 thousand in the FY 200102 to INR 84,582 thousand in FY 200203 (i.e. 19.65 percent increase in depreciation).
(iv).The turnover of the assessee company dropped by a sum of INR 16.80 crore over the last two financial years.The profit before tax earned by the assessee company stood at INR 1.72 crore in the FY 200102. The company suffered Substantial loss of INR 11 crore in the FY 200203.
We note that in view of the above facts, the assessee company had critical financial condition during the FY 200203.The Ld. CIT(A) accepted the cash profit margin as 24 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
appropriate net profit indicator (PLI) after considering the facts and circumstances of the case as mentioned hereinabove so that the tested party (i. e, assessee company) and the comparable companies are placed on the same foothold after eliminating the impact on profitability of the differences in respect of technology, age of assets used in production, capacity utilization and depreciation expenses and interest expenses. For that we rely of the judgment of the Coordinate Bench of Kolkata in the case AT &S India Pvt.Ltd (2015) 58 Taxmann.com73 (Koltrib) wherein it was held that application of ‘cash profit margin’, under TNMM, in manufacturing industry is appropriate for the reason that the same eliminated the impact on profitability of the differences in respect of technology, age of assets used in production, capacity utilization and depreciation expenses and its policies and interest expenses.
We note that during the course of hearing, theLd. counsel for theassessee submitted before the Bench that in the instant case, cash profit margin would be more appropriate financial indicator under the net profit margin. The assessee submitted the cash profit margin of itself and the comparable companies for the relevant financial year. The assessee demonstrated the reason for selecting cash profit margin as an appropriate financial indicator under the TNMM for the relevant financial year. It was explained that the assesseeincreased production capacity substantially from 2900 MT in FY 200102 to 3400 MT in FY 200203. Inspite of the increase in capacity, the sales of the assessee decreased from INR 550,440 thousands in FY 200102 to INR 5,31,300 thousands in FY 200203. On the other hand, the provision for depreciation increased from INR 70,693 thousand in the FY 200102 to INR 84,582 thousand in FY 200203. The assessee was not in possession of capacity related information regarding comparable companies for the FY 200203 so as to enable it to make capacity utilization adjustment in the comparable companies. In view of this, the selected cash profit margin as an appropriate financial indicator under the TNMM and computed the same for itself and comparable companies based on the financial information already submitted to the TPO so that the tested party and all the comparable companies can be placed on the same foothold.
25 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
We note that for determining the fair and true profit for the purpose of the application of the TNMM, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. The best way of computing operating profit would be to compute profit before depreciation in respect of each of the comparable company. It would take out the inconformity or the variation in the profit level of the comparables arising due to adoption of different method of charging depreciation. For this we rely on the judgment of the Coordinate Bench of ITAT Delhi in the matter of SchefenackerMotherson Ltd. V. Incometax Officer [2009] 123 TTJ 509 (Delhi) wherein coordinate bench confirmed the use of cash profit for the purpose of application of the TNMM.We also rely on the decision of the Hon'ble Bombay High Court in the matter of CIT vs. Reuters India (P) Ltd reported in [2016] 69 taxmann.com 187 (Bombay) wherein the Hon'ble High Court confirmed the application of the cash profit margin for the purpose of computation of net profit indicator (PLI) under the TNMM. Keeping in view the aforesaid judicial precedents, we approve the use of cash profit margin by the assessee for placing the tested party and the comparable companies on equal footing. The assessee has demonstrated that the cash profit margin of the assessee was 8% (approximately), whereas the arithmetic mean of the cash profit margins of the aforesaid nine comparable companies stands at 12.41%. It is noted that the net profit margin of the tested party was ()6.70%, whereas the cash profit margin of the tested party stood 8% thereby indicating that the loss was caused by a considerable increase in provision for depreciation. We are of the considered view that the assessee was justified in applying cash profit margin as more appropriate financial indicator than net profit margin.
We note that so far computation of arm's length range of ±5% based on OP/TC ratio (AY 200203) is concerned, the Ld. CIT(A), in paragraph no. 18, page no. 26 of his order for AY 200203, mentioned that he had accepted eleven comparable companies (selected by the assessee company in transfer pricing study report) as functionally comparable to the assessee company for the purpose of the arm's length analysis under the TNMM. Without prejudice to above, the Ld. CIT(A), confirmed
26 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
that even if Cosmo Ferrites Ltd was selected as the sole comparable, the international transactions under consideration were at arm's length under the TNMM after application of ±5% arm's length range. The aforesaid decision of the Ld. CIT(A) is based on the computation of arm's length range of ±5% based on OP/Sales ratio.
We note that in subsequent years, the comparable companies selected by the assessee company were accepted by the ld TPO. We note that the assessee company functioned as a manufacturer and supplier of soft ferrite components (electronic components). For A.Y. 200405 and A.Y. 200506, the assessee company considered the associated enterprises as tested parties and selected comparable companies which were accepted by the then ld. TPO after examining the facts and circumstances of the case. During the F.Y. 200506 (A.Y. 200607), the assessee company was merged with EPCOS India Private Limited which was manufacturer and supplier of capacitors (electronic components). The merged company became manufacturer of soft ferrites components and capacitors. The assessee company selected the entity level TNMM for bechmarking international transactions relating to manufacturing function and selected itself as tested party. The assessee company considered the following Indian companies as comparable:
27 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
28 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
29 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
As disclosed in above tables, the ld. TPO, while examining the arm’s length analysis under the entity level TNMM, had accepted comparable companies manufacturing wide range of electronics and related products and having functional similarity with the assessee company. Therefore, based on the same facts, products and circumstances, the ld TPO accepted in subsequent assessment years a few comparable companies for ALP under TNMM.
We note that the TPO rejected many of the comparable companies selected by the assessee in the TPSR(Transfer pricing study report) mainly based on two allegations Viz: (1) Turnover is incomparable to the assessee and (2) Product mixes of the independent companies were different from that of assessee. So far first allegation of TPO is concerned, we place reliance on the judgment of the Coordinate Bench of ITAT Bangalore in the case of DCIT Vs. Sierra India (P) Ltd, 74 Taxmann.com 110 wherein it was held that since the turnover of the assessee was Rs.45.85 crore, the permissible range of turnover of companies stood at Rs.4.58 crores, that is, onetenth of the assessee`s turnover to Rs. 458.50 crores ( ten times of the assessee`s turnover). The ld CIT(A) rightly noted that turnover for the relevant financial year of the following comparable companies fall within the permissible range as aforesaid: Sl.No. Name of companies Turnover (FY 200203) Rs. in Crore)
Tested party 53.13
Comparable Companies
Akasaka Electronics Ltd Data not available
Anand Electronics Ltd Data not available
1 CTR Manufacturing Inds Ltd 27.73
2 Continental Device India Ltd 97.12
3 Cosmo Ferrites Ltd 26.90
4 Deltron Ltd 19.63
5 Fineline circuits Ltd 13.38
6 Incap Ltd 11.65
30 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
Karnataka Hybrid Micro devices Ltd Data not available Keltron components complex Ltd Data not available 7 Pan electronics (India) Ltd 8.05 8 Ruttonsha International Rectifier Ltd 6.41 9 SPEL Semiconductor Ltd 53.03 SanmarMicropack Ltd Data not available
In disposing of the second allegation of the Ld. TPO, we have noted that the Ld. TPO made the arm's length price adjustment of Rs.10,02,37,000/ under the TNMM based on the operating result of only two comparable company namely (i) Cosmo Ferrites Ltd which was engaged in production of exactly the same product as the assessee and (ii) Continental Devices India Ltd which was engaged in production of semi conductors.In this connection, we have analysed the methods prescribed under sub section (1) and (2) of section 92C of the Incometax Act, 1961, read with subrule (1) of rule 10B of the Incometax Rules, 1962. We have considered the decision of the Coordinate Bench of Mumbai Tribunal in the matter of Diageo India (P.) Ltd vs. DCIT reported in [2013] 34 taxmann.com 284(Mumbai Trib.), wherein it was held that the product similarity has to be seen while applying CUP method and not under the TNMM because under the CUP, the focus is on the price of the product sold or transferred and under the TNMM, functional comparability of transactions is to be analysed at net profit margin level. If such a high degree of similarity is to be seen in TNMM, then it would become impractical to apply TNMM in any of the case. It is noted that the principle enunciated by the Coordinate Bench of Mumbai Tribunal in the aforesaid decision, finds support in the OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administration. The principle enunciated by the Coordinate Bench Mumbai Tribunal in the aforesaid decision also finds support in the decision of the Mumbai Tribunal in the matter of Maersk Global Centres (India) (P.) Ltd. vs. ACIT reported in [2014] 43 taxmann.com 100 (Mumbai Trib.) (SB)and the decision of the Bangalore Tribunal in the matter of GE India Technology Centre (P) Ltd vs. DDIT reported in [2013] 30 taxmann.com 249 (Bangalore Trib.) and the
31 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
decision of the Mumbai Tribunal in the matter of DCIT vs. Rolls Royce Marine India (P.) Ltd reported in [2016] 70 taxmann.com 245 (Mumbai Trib.). Based on the above precedents,we are of the considered view that under the TNMM, the focus should be on the functional comparability between controlled and uncontrolled transactions.
We note that FAR ( Function, Asset, Risk) analysis of the aforesaid nine comparable companies selected by CIT(A)(i.e. CTR Manufacturing Inds Ltd, Deltron Ltd, Fineline circuits Ltd, Incap Ltd, Pan Electronics (India) Ltd, Ruttonsha International Rectifier Ltd, SPEL Semiconductor Ltd, Continental Device India Ltd and Cosmo Ferrites Ltd). are comparable with the FAR of the assessee company for the relevant financial year. Therefore, considering the entirety of facts and circumstances of the case and the material on record, and relying on the precedents cited above we uphold the nine comparable companies selected by the ld CIT(A) and use of cash profit margin ratio in TNMM, we uphold the order of ld. CIT(A) to delete the ALP adjustment of Rs.l0,02,37,000/ for A.Y.200304 and ALP adjustment of Rs.5,19,77,000/for A.Y.200203.
In the result, the appeals of the Revenue ( in respect of transfer pricing grounds) are dismissed.
Now, we shall take other miscellaneous grounds raised by the Revenue.
26.(i).Ld CIT(A) erred in deleting provision for payment of gratuity under section 40A(7) of the Act and addition made on account of contribution to superannuation fund U/s 40A(9) of The Act.
(a). Provision for gratuity u/s 40A(7), for A.Y.200203 Rs.8,28,600/ (b). Provision for gratuity u/s 40A(7), for A.Y.200304 Rs.20,71,870/ (c ).Contribution to Superannuation Fund U/s 40A (9), for A.Y. 200203 Rs.14,75,778/ (d).Contribution to Superannuation Fund U/s 40A (9), for A.Y. 200304 Rs. 5,47,224/
32 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
We have heard both the parties and perused the material available on record, we note that these grounds relate to payment of gratuity u/s.40A(7) of the Act and contribution to superannuation fund u/s. 40A(9) of the Act.
Before us, ld Counsel for the assessee submitted that the assesssee company was not maintaining the group gratuity and superannuation funds on its own but are maintained and managed through the Life Insurance Corporation of India (LIC). In this connection, it was stated thatsince the funds are not being maintained by the assesssee company or the trusts set up by the assesssee so there was no need to get any approval from the concerned Commissioner. The assesssee duly stated the above facts before the tax auditor but they did not appreciate the above fact and qualified the same under section 43B of the Act in his tax audit report that approval of the Commissioner of Income Tax is awaited for both the funds.
We note that the assesssee has claimed the deduction for the contribution made to Gratuity fund and Superannuation fund during the previous year relevant to the assessment year under consideration. The assesssee was maintaining the said fund not on its own but managed and maintained through the Life Insurance Corporation of India. Therefore, the contribution made to Superannuation and Gratuity fund maintained by the LIC can be claimed by the assesssee while computing the total income and would not be hit by the provision of sections 40A(7) & 40A(9) of the Act. Therefore, we delete the above mentioned additions. That being so we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby upheld and grounds raised by the Revenue are dismissed.
27.(ii). Ld CIT(A) erred in deleting the addition made on account of provision for tax at Rs.7,50,000/. This ground is raised by Revenue in A.Y.200203.
We have heard both the parties and perused the material available on record. The ld Counsel submitted before us thatthe AO has failed to appreciate the fact that the assessee company had computed its total income chargeable to tax by taking net profit before tax amounting to Rs.1,72,46,000/. A copy of the relevant extract of 'Profit and Lossaccount' for the year ended as on 31032002 evidencing the same is 33 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
submitted.Moreover, in the assessment order under section 143(3) of the Act the AO has also computed the total assessed income taking profit before tax amounting to Rs. 1,72,46,000/ as starting point. Therefore, the provision for tax amounting to Rs. 7,50,000/ was actually not claimed by the assessee company.
We note that since the assessee had computed its total income chargeable to tax by taking net profit before tax amounting to Rs.1,72,46,000/ and the Ld. AO has also computed the assessed income taking profit before tax amounting to Rs.1,72,46,000/ as starting point. Therefore, the provision for tax amounting to Rs.7,50,000/ was not claimed by the assessee and as such the ld CIT(A) has rightly deleted the disallowance made on this account. Therefore, we confirm the order passed by the ld CIT(A).
29.(iii). Ground Nos. 6, 7, 8, and 9 raised by the Revenue are interlinked and common. These grounds relate to computation of deduction under section 80HHC of the Act. The main grievance of the Revenue in these grounds are that CIT(A) was erred in directing the AO to consider foreign exchange gain as a part of export turnover, while such gains were not derived out of export activity and were not earned in convertible foreign exchange. The CIT(A) was also erred in allowing cross currency swap and miscellaneous income as part of profit to compute deduction u/s 80HHC and reduce sales tax from total turnover. These grounds are raised by Revenue in A.Y.200203.
30.After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the present Ground nos. 6, 7, 8, and 9 raised by the Revenueare no longer res integra. We note that ld CIT(A) has adjudicated the issue in favour of assessee observing the followings:
“1. I have carefully considered the entire facts and circumstances of the case and submission filed by the Ld. AR of the assessee company. I have also carefully perused the calculation of deduction u/s 80HHC as computed by the Ld. AO. On perusal of the submission filed by the assessee, I find that the Ld. AO has not added the foreign exchange gain to the export turnover even though the same was added to the total turnover. In this regard reliance has been placed by the assessee on the decision of the Hon'ble Delhi Tribunal in the case of Sujata Grover (supra) wherein it has been held that gains made from exchange rate fluctuation is part of the export turnover. My
34 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
attention was also drawn to the decision of the Hon'ble Jurisdictional Tribunal in the case of Chloride India Ltd. (supra) wherein it was stated that to make an apple to apple comparison the gain on foreign exchange as added to the total turnover should also be added to the export turnover as well. 2. In view of the above, I direct the Ld. AO to add back the gains on foreign exchange while computing 'export turnover' for the purpose of computing deduction u/s 80HHC of the Act. 3. The assessee has further stated that "the AO has erroneously excluded the entire income received on account of DEPB licence amounting to Rs.2,00,71,000/- instead of deducting the 90% of the same". 4. I have carefully considered the submission and the computation of deduction u/s 80HHC for the assessment year 2001-02 wherein the Ld. AO had correctly excluded 90% of the export incentive (i.e. DEPB credit) instead of deducting the entire DEPB credit as in the instant case i.e. assessment year 2002-03. 5. For the relevant assessment year, since the Ld. AO has not excluded 90% of the export incentive (i.e. DEPB credit), I direct the Ld. AO to exclude only the extent of 90% of DEPB credit as stated in the provision of clause (baa) of Explanation to section 80HHC for the purpose of computing deduction u/s 80HHC. 6. The assessee has further stated that the “AO has erroneously deducted 90% of earnings from cross currency swap transactions amounting to Rs.51,69,000/- and miscellaneous income amounting to Rs.16,48,000/- from the 'profit of the business respectively. 7. I have carefully considered the submission of the assessee and the provision stated in clause (baa) of Explanation to section 80HHC of Act wherein nothing has been mentioned in respect of exclusion of earning from cross currency swap transactions and miscellaneous income for the purpose of the calculation of "profits of the business". 8. In view of the same, I, direct the Ld. AO to include the earning from cross currency swap transactions and miscellaneous income for the purpose of the calculation of "profits of the business" for the purpose of computing deduction u/s 80HHC. 9. The assessee has also stated that the "AO has erroneously not deducted the sales tax amounting to Rs.75,31,000/- from the total turnover". 10. I have carefully considered the decision of the Hon'ble Jurisdictional Tribunal in the case of Chloride India Ltd. vs Deputy Commissioner (supra) wherein it has been held that in order to make an apple to apple comparison, the sales tax should be deducted from the total turnover as the same has not been considered in the export turnover. In view of the above, I direct the Ld. AO to deduct sales tax from total turnover for the purpose of computing deduction u/s 80HHC of the Act.
35 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
11.In view of the above findings, I direct the Ld. AO to re-compute the deduction to be allowed u/s 80HHC of the Act after taking due consideration of the above facts enumerated by me. The aforesaid ground of the appeal is accordingly allowed. Admission of Additional Ground of Appeal 12.It is now well settled by the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra) that an assessee is entitled to raise a new ground before the Hon'ble Tribunal for the first time even if the same was not raised at any time before the lower authorities. 13. In the instant case, the facts relating to the additional grounds of appeal are embedded in the order passed under section 143(3) of the Act. Therefore, since the relevant facts relating to the additional ground are undisputedly available in the assessment order, I admit the additional ground of appeal filed by the assessee. DECISION ON MERITS 14. I have carefully considered the submission filed by the assessee and the case laws relied on by the ld.AR in respect of deduction u/s. 80 HHC at 100% of export profit in the computation of Book Profit, being the same was the profit eligible for deduction under the said section in computing Book Profit, as against 70% of export profit allowed by the AO as contended by the assessee. 15. I have also considered the decision of the Hon’ble Apex Court in the case of Ajanta Pharma Ltd (supra) wherein it has been stated that while computing deduction under section 80HHC of the Act in computing Book Profit though the amount of ‘eligible profit’ should be allowed and not the ‘extent of deduction’as prescribed in section 80HHC(IB) of the Act. The Hon’ble Apex Court thus held that deduction u/s. 80HHC of the Act would be allowable at 100% for assessment year 2002-03 while computing Book Profit though the same could be restricted to 70% while computing deduction under normal provisions of the Act. 16.Since the assessee would be entitled to avail the benefit u/s 80HHC at 100% of export profit in computing Book Profit for the relevant year, in my view, the same cannot be restricted to 70% by applying the provisions of section 80HHC(IB) of the Act which is applicable under the normal provisions of the Act. Accordingly, I direct the ld. AO to allow deduction u/s 80HHC at 100% of export profit on finally assessed Book Profit. The aforesaid additional ground of the appeal is accordingly allowed.”
We note that Ld. counsel cited plethora of the case laws to bolster his claim which are not being repeated again since it has already been incorporated in the submissions of Ld. A.R. and have been duly considered to arrive at our conclusion. The Ld. DR could not bring to our notice any case laws to contradict the findings of the Ld. CIT (A), therefore, his order on
36 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
these covered issues noted above are hereby upheld and grounds raised by the Revenue are dismissed.
31.(iv). Ground Nos. 3 and 4 raised by the Revenue for A.Y.200304 relate to addition deleted by the ld CIT(A) under section 40(a) (ia) of the Act by accepting fresh evidence in violation of provisions of Rule 46A of the I.T. Rules.
32.We have heard both the parties and perused the material available on record. We note that Ld. AOmade the impugned disallowance in respect of payments made to nonresident associated enterprise amounting to Rs.4,15,65,683/ on the ground that payments were made without deduction of tax at source. We note that during the course of hearing, both, that is, ld Counsel for the assessee as well as ld DR for the revenue have fairly agreed that this issue should be sent back to the file of the assessing officer for verification of TDS certificates with the challans indicating deposit of the amount to the government exchequer. Therefore, we set aside the order of the ld CIT(A), so far this issue is concerned, and remit the matter back to the file of the assessing officer for his examination. Statistical purposes, this ground of the Revenue is treated to be allowed.
(v). Ground Nos. 7 and 8 raised by the Revenue for A.Y.200304 relate to addition deleted by the ld CIT(A) under section 43B of the Act in respect to payment of interest on term loan under section 43B of the Act in violation of provisions of Rule 46A of the I.T. Rules.
We have heard both the parties and perused the material available on record. We note thatthe clause (d) of section 43B of the Act which interalia states that deduction under section 43Bof the Act would be allowed in respect of interest on any loan in the previous year in which such sum is actually paid by assessee. The proviso to the said section states that nothing contained in section 43B of the Act shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under subsection (1) of section139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and theevidence of such payment is furnished by the assessee along with 37 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
such return. We note that the assessee in the course of the appellate hearing submitted the payment details in respect of payment on interest on term loan after the due date of the filing of the return for the assessment year 200203 and disallowed by the Ld. AO in the assessment year 200203. We note that since the assessee had paid the interest on term loan amounting to Rs.14,69,315/ as on 01112002 i.e. after the duedate of filing the return of income under section 139(1) of the Act for the assessment year 200203 therefore, the assessee would be entitled to avail the deduction amounting to Rs.14,69,315/ in the assessment year 200304, in the year in which the actual payment has been made. Therefore, ld CIT(A) has rightly directed the AO to allow deduction under section 43B of the Act for the sum of Rs.14,69,315/ in the assessment year 200304.That being so, we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the revenue is dismissed.
In the result, the both appeals filed by the revenue are dismissed, except other ground no.iv, vide para 31 of this order, which we have allowed for statistical purposes.
Order pronounced in the open court on this 30.01.2019
Sd/ Sd/
(A.TVarkey) (A. L. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER कोलकाता /Kolkata; Dated: 30.01.2019 **PP, Sr.PS
आदेशक���त�ल�पअ�े�षत/Copy of the Order forwarded to : अपीलाथ�/ The Assessee/Revenue: DCIT, Cir11(1), Kolkata 1. P7 Chowringhee Square, Kolkata700 069. ��यथ�/ The Assessee/Assessee. M/s. EpcosFerrities Ltd 2. (since merged with M/s. Epcos India Pvt. Ltd, KuliaKanchrapara Road, P.O
38 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)
Netaji Subhas Santor, Kalyani, Nadia, Pin 741251 (W.B). आयकरआयु�त(अपील) / The CIT(A) 3. आयकरआयु�त/ CIT 4. �वभागीय��त�न�ध,आयकरअपील�यअ�धकरण,कोलकाता/ DR, ITAT, Kolkata 5. गाड�फाईल / Guard file. //True Copy/ By Order 6. Assistant Registrar I.T.A.T, Kolkata Benches,Kolkata.
39 ITA Nos.1597 & 1598/Kol/2017 M/s.Epcos Ferrites Ltd (Since merged with M/s. Epcos India P.Ltd)