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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद", राजे" के अनुसार/ PER Rajendra A.M.- Challenging the order dated 19.4.2013 of CIT(A)-15, Mumbai the assessee and the Assessing Officer(AO)have filed cross appeals for the year under consideration.Assessee-company, engaged in the business of manufacturing and sale of textile machinery and sale of related spare parts filed its return of income on 13.9.2008, declaring income of Rs.2.28 crores under the normal provisions of the Act and Rs.4.53 crores u/s.115JB.The AO completed the assess - ment u/s.143(3)r.w.s.144C(3)(b)of the Act on 31.1.12,determining the income of the assessee at Rs.3.85crores under the normal provisions and at Rs.4.76 crores under MAT provisions. : 2.First effective Ground(GOA 1-6)of appeal filed by the AO is about applying most appropriate method for benchmarking royalty transactions. During the assessment proceed - ings,the AO found that the assessee had entered into International Transactions(IT.s)relating to purchase of components,valuing Rs . 22.93 crores,that it had used CPM as the most appropriate method, that for international transactions relating to sale of components, purchase of fixed assets and payment of royalty it had used TNMM,that the PLI was at 5.97% (OP/sales),that the margin of the four comparables was found at 0.15% . The AO made a reference to the TPO,who called for further details in that regard. In its response the assessee submitted that the technology supplied by the AE was of superior quality, that it resulted in 4851/M/13 & 4898/M/13-Zinser Textile Sys.P.Ltd. saving employee cost and increase profit margin.After considering the submissions of the assessee and the Technical Know-how agreement, the TPO held that under the agreement the licensor was required to impart transfer and convey the technical know-how,that the assessee had not manufactured any component or machine, that it was involved only in assembling of the components, that contention of the assessee that on account of the technology it was able to command better prices was not acceptable, it had not demonstrated of obtaining new technical knowledge or deriving any benefit from the said use, that the assessee was not justified in making payment to the AE under the head royalty, that in similar circumstances, no third party would pay any amount for alleged technical know-how which had not resulted into any economic benefit to it. Accordingly,the arms-length price (ALP) of the transaction in question was taken at Nil as against payment of Rs. 63.64 lakhs. The AO made an addition of Rs.63,64,620/- as advised by the TPO.
2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).Before him,the assessee made elaborate submissions about technical know-how,on-going technical support new technological development, upgrade for the machine design and software and technical assistance provided by the AE. It was further argued that the TPO had ignored the fact that the net profit of the company had increased over a period of time, that the finding of the TPO that there was no incremental benefit from payment of royalty was factually incorrect, that assessee’s operating margin was higher than all the comparables, that the assessee had incurred an expenditure of 1.29% of the total turnover under the head penalty, that the TPO had accepted the same comparables for earlier years, that TPO had not carried out fresh search for comparable while rejecting the comparable companies selected by the assessee. After considering the submission of the assessee and the assessment order, the FAA held that similar issue of disallowance/adjustment of payment made towards royalty was considered by him while deciding appeal for AY.2007-08,that it was held that entity level TNMM was the most appropriate method to bench mark the international transaction relating to purchase of components, sale of components and payment of royalty,that the facts of the case under consideration were similar to the earlier years that the international transactions of the assessee should be bench marked on entity level aggregating them.Referring to the earlier years orders, he held that only two companies should be considered as comparables for the benchmarking purposes, that the arithmetic mean of PLI.s of the set of two comparables was 1.31% on cost and 0.70% on sales as compared to the margin 5.97% and 6.36% respectively, 4851/M/13 & 4898/M/13-Zinser Textile Sys.P.Ltd. that the international transaction of the assessee were consistent with the ALP standard. He further held that assembly of machines required very high level of precision and accuracy that it was a manufacturing process per se,that the TPO had not carried out some fact finding exercise in respect of the comparables.Finally,he held that the AO was not justified in holding that payment of royalty should be taken at Nil, that the addition made by the AO had to be deleted.
2.2.Before us,the DR supported the order of the TPO and stated that the TPO had applied CUP Method. The AR stated that there was no basis for rejecting the method adopted by the assessee. He referred to the cross appeals decided by the Tribunal(ITA No.42/Mum/2012 and 8595/Mum/2011 dt.3.7.2013-AY 2007-08.)
2.3.We have heard the rival submissions and perused the material before us. We find that while passing the order for the last AY the TPO had held that TNMM was the most appropriate method for benchmarking, that he had made an adjustment of Rs.1.50 crores under the head royalty payment, that the Tribunal had decided the issue in favour of the assessee. We find that the TPO had not given any reasons for not following the TNMM as most appropriate method the year under consideration. No doubt the income tax authorities are not bound by the orders of the earlier years, but they have to pass a reasoned order for deviating from the stand taken from the earlier years. We find that the TPO has not brought on record the differences,if any, of the facts of the earlier AY.and the year under appeal. Secondly,the Tribunal has already decided the issue in favour of the assessee in following manner:- “7. In view of the above submissions we first take up the issue of benefit as per the proviso to section 92C(2) of the Income Tax Act. The assessee company is engaged in the business of manufacturing and dealing in textile machinery and it’s spare. The assessee is a joint venture between M/s ATE Enterprises Pvt. Ltd. and M/s Saurer Gmbh. M/s Saurer Gmbh & Com. KG holds 70% shares in assessee’s company. During the year under consideration, the assessee has under taken international transaction relating to purchase and sale of components, payment of royalty and reimbursement (payment) with its AE. The assessee bench marked the International transaction relating to purchase of components valuing Rs. 22.93 crores by using Cost Plus Method (CPM) as most appropriate method. For the international transaction relating to sale of components and payment of royalty, the assessee has used Transaction Net Margin Method (TNMM) as the most appropriate method. The transfer pricing officer found that royalty @ 4% on sale price has been paid to the AE and accordingly the assessee was asked to produce the details in respect of benefit derived from the use of technical know-how along with the economic benefit derived by the assessee against the payment of royalty. After considering the reply and submission of the assessee the TPO held that the payment of royalty made by the assessee is not at arm’s 4851/M/13 & 4898/M/13-Zinser Textile Sys.P.Ltd. length. The TPO has applied TNMM as most appropriate method for bench marking, the international transaction and worked out an adjustment at Rs. 1.80 crores but since the payment of royalty being only at Rs. 1.50 crores, the ALP of such payment of royalty has been determined by the TPO at Nil and accordingly made an adjustment of Rs. 1.50 crores. On appeal, the Commissioner of Income Tax(Appeals) enhance the assessment by making the adjustment in respect of the International transaction of purchase of components. The Commissioner of Income Tax(Appeals) has bench marked all the International transaction of the assessee by using TNMM as most appropriate method and operating profit to sale as PLI and considering only two comparables. The Commissioner of Income Tax(Appeals) has determined the arithmetic mean at 8.33% as against the assessee’s operating profit/sale at 4.71%. Accordingly, the Commissioner of Income Tax(Appeals) has enhanced an adjustment to Rs. 2,56,62,326/- as against the adjustment made by the TPO at Rs. 1,50,68,228/-. Consequently, a differential amount of Rs. 1,05,94,098/- was directed to be enhanced.
We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. Though the assessee has carried out various international transaction regarding payment of royalty, purchase of component and sale of component, however, the TPO made adjustment only with respect to royalty payment by treating the ALP of royalty at nil. The Commissioner of Income Tax(Appeals), though confirm the adjustment made by the TPO in respect of royalty payment but also enhanced the assessment by making adjustment in respect of purchase of component. The Commissioner of Income Tax(Appeals) has determined the ALP by taking the TNMM as most appropriate method but at the entity level of the assessee. The Commissioner of Income Tax(Appeals) has arrived at the arithmetic mean of the comparables operating profit at 8.33% against the operating profit at the entity level of the assessee at 4.71%. Though we do not approve the approach of the Commissioner of Income Tax(Appeals) for bench marking the purchase of component by taking the entity level results of the assessee instead of considering the data of international transactions only. Even otherwise as per the transfer pricing provisions/regulation each and every international transaction has to be bench marked by comparing Independent Uncontrolled Transaction. Since, the revenue has not challenged finding of Commissioner of Income Tax(Appeals) on the issue of transfer pricing adjustment, therefore, we do not propose to go into the issue which has not been raised before us. At the outset we note that the sale price of the assessee is within the tolerance limit of 5% as per the proviso to section 92C(2) of the Income Tax Act, which is clear from the working of the Commissioner of Income Tax(Appeals) at page no. 22 of the impugned order as under:
Sl.No. Particulars As per assessee (Form As per TPO ALP 3CEB) determined as per appellate order
Operating Income(OI) 62,30,58,589 62,30,58,589 62,30,58,589 2. PLI(OP/SALES) 4.71% 7.61% 8.83 3. Operating Profit (OP) 2,93,53,747 4,74,14,758 5,50,16,073 4. Operating Cost 59,37,04,842 57,56,43,831 56,80,42,516 Adjustment Rs.256,62,326(Rs.59,37,04,842-Rs.56,80,42,516)
9.The Commissioner of Income Tax(Appeals) appeal has determined the ALP being operating cost at Rs. 56,80,42,516/- as against the operating cost of the assessee at Rs. 59,37,04,842/- and accordingly made the adjustment of the difference amount into Rs. 256,62,326/-. The operating cost of the assessee is within the 5% tolerance range of the ALP determined by the Commissioner of Income Tax(Appeals), therefore, no adjustment is called for on this account. It is pertinent to note that the Commissioner of Income Tax(Appeals) has determined the arm’s length by considering the entity level results of the assessee which 4851/M/13 & 4898/M/13-Zinser Textile Sys.P.Ltd. includes all the international transactions, therefore, when the over all price of the assessee is within the range of 5% of ALP being the arithmetic mean then no adjustment is permitted.
Respectfully,following the above order of the Tribunal for the AY 2007-08 (supra), we decide the effective Ground of appeal against the AO.
3.Next effective ground of appeal is about deleting the addition of Rs.22.38 lakhs under the head provision for warranty (GOA-7-9). It was brought to our notice that the Tribunal, while deciding the appeal for the earlier year, had dealt with the issue. We are reproducing the relevant portion of the said order and same reads as under :- “20. We have considered the rival submission as well as relevant material on record. The Assessing Officer has disallowed the claim of the assessee on the ground that the estimation of provision for warranty is not based on any previous data. On appeal, though the assessee has furnished concerned details and claim that the provision for warranty is based on the actual expense incurred in the earlier years, however the Commissioner of Income Tax(Appeals) has not discussed the fact and aspect whether the provision is based on reliable estimates or not. The decision of Hon’ble Supreme Court in case of Rotork Controls India Pvt. Ltd. Vs CIT (supra) has been considered by the Hon’ble Madras High Court in the recent decision in case of Renowned Auto Products Mfrs. Ltd. Vs ITO, 354 ITR 127 in para 12 & 13 as under: “No doubt, the learned counsel for the assessee relied on the decision of the Apex court reported in Rotork Controls India P. Ltd. v. CIT [2009] 314 1TR 62 (SC) to substantiate his contention that the estimated provision for warranty cost is allowable. The very same decision was considered by the Division Bench of this court in CIT v. Forbes Campbell Finance Ltd. Cf. C. (A.) Nos. 148 to 155 of 2005, dated July 9, 2012) since reported in [2013] 352 ITR 602 (Mad) wherein it was observed at paragraphs 14 and 16 as follows (pages 607 and 608): “We reject the claim of the assessee on both counts. As far as the reliance placed on the decision reported in Rotork Controls India P. Ltd. v. CIT [2009] 314 1TR 62 (SC) is concerned, in considering the claim on a provision made for warranty claim, the apex court held that ‘a provision is recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized….. Thus, the apex court pointed out that the provision has to be made based on reliable estimation of the obligations. Unless the three conditions recognising the liability are satisfied, the claim could not be automatically allowed as a provision made on a historical trend.” After observing so, the hon’ble Division Bench further held at paragraph 18 that the provision for service charges payable by the assessee by way of warranty provision was not made on any scientific data. By applying the facts of the case to the law declared by the apex court, it was further observed therein that the provision made was only on ad hoc basis which was a fact recorded by the Tribunal. Here also, the Commissioner as well as the Tribunal categorically found that the assessee had not proved the provision of warranty expenses based on any scientific method in such circumstances, the assessee cannot place reliance on the decision of the hon’ble Supreme Court reported in Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) as the facts are totally distinguishable. Even otherwise the assessee has to pass through the triple test as declared therein in order to succeed in his claim on provision for warranty. In the absence of any such finding in its favour satisfying the said triple test, the assessee can not rely on the said decision of the apex court. We do not find any merits in the appeal and, therefore, both the questions of law are answered against the assessee. Accordingly, the tax case appeal is dismissed. No costs.”
21. Accordingly, we set aside this issue to the record of the Assessing Officer to decide this issue after examination of relevant facts as well as in light of the decision on this point. Since, the finding on the issue of warranty provision under normal computation of income will have 4851/M/13 & 4898/M/13-Zinser Textile Sys.P.Ltd. bearing on the computation of book profit u/s 115JB, therefore, we remit this issue of adjustment u/s 115JB to the record of AO for decision the same as per law. Respectfully following the same, we restore back the matter to the file of the AO for fresh adjudication and decide the second effective ground in favour of the AO, in part. 4.Effective Ground of appeal is about confirming the addition of Rs.17.06 lakhs to the income of the assessee in respect of purchase of fixed assets. During the assessment proceedings,the AO found that the assessee had purchased one used machining centre and accessories, amounting to Rs.45.06lakhs from own group entities.During the TP proceedings the assessee was asked to provide cost of assets recorded in the books of the AE in respect of the asset.The TPO observed that inspite of sufficient time provided the assessee failed to provide requisite information,that it contended that before acquiring the machine it had obtained a certificate from independent chartered engineer, that the valuation report revealed that the machine was constructed in 1986, that its purchase price was 2.29 lakhs Euro, that its actual value as on August 2007 was shown Euro 50,500. Applying the Euro rate of August 2007 the TPO determined the value of the machine at Rs.28.02 lakhs.Accordingly, the payment of Rs.45.06 lakhs was not found to be at ALP. Finally, he made an adjustment of Rs. 17,06,492/-(Rs.45.06 lakhs-Rs.28.00 lakhs).The AO while passing the order made an adjust - ment of Rs.17.06 lakhs to the total income of the assessee.
4.1.During the appellate proceedings before the FAA, the assessee contended that adjustment made by the AO would not have any impact on the taxable income for the year, that the machinery in question was part of the capital work in progress (CWIP) as on 31.3.2008, that the adjustment proposed by the TPO would only reduce the value of CWIP to be carried forward to following year, that the assessee had not claimed any deduction on account of depreciation for the same in the AY 2008-09, that there was no impact on profit/loss of the assessee on account of the adjustment, that the assessee had filed rectification application before the AO in that regard vide its letter dt. 16.3.12. after considering the submission of the assessee the order of the TPO and the AO he held that the purchase of fixed asset was an international transaction,it was imperative to determine the income arising from the transaction, that the assessee itself had reflected the transaction as IT in its audit report and had determined ALP following TNMM , that as per the provisions of section 92(1) of the Act, assessee’s IT undertaking had to be taxed as per the normal provisions of the Act and in 4851/M/13 & 4898/M/13-Zinser Textile Sys.P.Ltd. addition to the same had to be governed by the principles of Arms-length price (ALP), that in section 92-92F of the Act or Rule-10B-10C there was no differentiation in respect of the treatment to capital account transaction or trading transaction, that it was nowhere mentioned that if capital account transaction undertaken were not at Arm’s-Length then TP provisions would not be applicable,that there was no such mandate of law that if there was no impair - ment of cost/expenses debited in the tax payers P&L account then the provisions of section 92CA(4) would not be applicable to such IT. Accordingly he rejected the claim about CWIP and upheld the order of the AO/TPO.
4.2.Before us, the AR argued that the machinery was part of WIP,that the assessee had not claimed any depreciation on the machinery for the year under appeal,that in TP adjustment only depreciation can be disallowed,that the Chartered Engineer had issued a certificate about the value of the machine,that there was no justification for disbelieving the certificate.He referred to the cases of Ciena India (P.)Ltd.(59taxmann.com92)and Vodafone(368ITR1).The DR supported the order of the FAA.
4.3.We have heard the rival submissions and perused the material before us.We find that the machine purchased by the assessee was included in the WIP.In the case of Ciena India (P.)Ltd.(supra)it has been clearly held that in case of purchase of fixed assets from AE it is amount of depreciation on purchase of fixed assets which will be considered for making addition and not difference between the transacted valued the ALP determined at Nil (Paragraphs 15.1-15.6).We hold that the FAA was not justified in making the addition of Rs. 17.06 lakhs.He should have added only the depreciation-amont.It will affect the computation of depreciation for subsequent years.Therefore,we are of the opinion that matter should be restored back to the file of the AO for determine the depreciation and restrict the disallowance to that extent only.Effective ground of appeal,raised by the assessee,is decided in its favour,in part. As a result, appeals filed by the AO and the assessee stand partly allowed. फलतःिनधा"रती अिधकारी और िनधा"रती "ारा दािखल अपील" अंशतः मंजूर क" जाती है. Order pronounced in the open court on 05th October, 2016. आदेश क" घोषणा खुले "यायालय म" "दनांक 05 अ टूबर,2016 को क" गई । (शि"जीत डे शि"जीत डे शि"जीत डे / Saktijit Dey) (राजे"" / Rajendra) शि"जीत डे "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई Mumbai; "दनांकDated : 05.10.2016. Jv.Sr.PS.
4851/M/13 & 4898/M/13-Zinser Textile Sys.P.Ltd.