The Dy. Commissioner of Income Tax, Circle-2(1)(1), Ahmedabad V. GMM P Foulder Pvt. Limited, Ahmedabad

ITA 2003/AHD/2016

AI Insights

This case involves multiple appeals by both the Assessee, GMM Pfaulder P. Ltd., and the Department of Income Tax, concerning the assessment years 2010-11 to 2012-13. The primary issues revolve around the determination of Arm's Length Price (ALP) for international transactions, the exclusion of Nile Ltd. as a comparable company, and various ad hoc disallowances related to expenses and transactions with associated enterprises. The Income Tax Appellate Tribunal (ITAT) in Ahmedabad heard these appeals, focusing on the application of the Transactional Net Margin Method (TNMM) and the Cost Plus Method (CPM) for ALP determination, and the appropriateness of certain disallowances made by the Assessing Officer.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 131539 (ITAT-AHMEDABAD)
• Duration Of Justice: 652 year(s) 10 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 03-10-2022
• Assessment Year: misc
• Appeal Filed On: 31-12-1369
• Other Referred Cases: National Thermal Power vs. CIT, CIT vs. India Gelatine and Chemicals Ltd., ACIT vs. M/s Mazda Ltd, Gujarat Carbon Industries Ltd vs. ACIT, Mallige Medical Centre (P.) Ltd. vs. CIT, Ras Information Technologies (P.) Ltd. vs. CIT, Kostub Investment Ltd. vs. CIT, Hitachi Home and Life Solution India Ltd vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Revenue expenditure; Rule 8D
• Section: 14A; 37(1); 44AB; 92CA

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH Before: Shri Waseem Ahmed, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Sl. No. Appeal ITA A.Y. Appellant Respondent 1. 1370/Ahd/2015 2010-11 The DCIT, Circle-4, A’bad GMM Pfaulder P. Ltd. A’bad 2. 2003/Ahd/2016 2011-12 The DCIT, Circle-2(1)(1), A’bad GMM Pfaulder P. Ltd. A’bad 3. 2827/Ahd/2016 2012-13 The DCIT, Circle-2(1)(1), A’bad GMM Pfaulder P. Ltd. A’bad 4. 951/Ahd/2015 2010-11 GMM Pfaulder P. Ltd. A’bad The DCIT, Circle-2(1)(1), A’bad 5. 2212/Ahd/2016 2011-12 GMM Pfaulder P. Ltd. A’bad The DCIT, Circle-2(1)(1), A’bad 6. 2213/Ahd/2016 2012-13 GMM Pfaulder P. Ltd. A’bad The DCIT, Circle-2(1)(1), A’bad PAN NO: AABCG056 3A Asses see b y : Shri S. N. Sopa rkar, Sr. A. R. & Shri Parin Shah, A. R. Revenue by : Shri Atul Pandey , S r. D. R. Date of hearing : 04-10 -2022 Date of pronouncement : 29-11 -2022 आदेश /ORDER I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 2 PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- These are three cross appeals filed by the assessee and the Department for assessment years 2010-11, 2011-12 and 2012-13. Since common issues are involved in all the years under consideration, the same are being taken up together. 2. The grounds of appeals are taken up as follows:- Assessment year 2010-11: Assessee’s ground of appeal: “1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case. 2. The Learned Commissioner (Appeal) erred in not deciding ground no 2(d) us under: "The learned Assessing officer erred in fact and in law in not considering Nile Ltd as comparable in applying Transactional Net Margin Method on invalid ground that Nile Ltd is engaged in different kinds of activity i.e. glass lined equipment division, lead division and wind energy." 3. The Learned Commissioner (Appeal) erred in disallowing Rs. 91,624/- on ad-hoc basis being 10% of the value of purchases from Glass Steel Parts and Services (Unit of Pfaulder Inc.). 4. The Learned Commissioner (Appeal) erred in disallowing Rs. 19,926/- on ad-hoc basis being 10% of the value of services received from Pfaulder Inc. 5. The Learned Commissioner (Appeal) erred in disallowing Rs. 60,873/- on ad-hoc basis being 10% of the value of services received from Mavag AG. 6. The Learned Commissioner (Appeal) erred in directing the A.O. to work out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 3 7. The Learned Commissioner (Appeal) erred in confirming the disallowance of Rs. 3,22,431/- being administrative expenses u/s 14A of the Act, considering them incurred in relation to exempted dividend income. 8. The appellant prays for appropriate relief on the above grounds of appeals. 9. The appellant craves leave to add, alter, amend, substitute, or withdraw any of the above grounds of appeal as circumstances may justify.” Additional Grounds of appeal: “Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT. 1. Both lower authorities ought to have made proportionate adjustments in respect of international transactions with Associated Enterprises in absence of segmental accounts and not to all international transactions. Appellant also craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal.” Department’s grounds of appeal: “1. The Ld.CIT(A) has erred in law and on facts in deleting the upward adjustment of Rs.1,83,53,946/- made on the International Transactions. 2. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs.1,90,05,000/- made on account of interest expense u/s 36(l)(iii) of the Act without appreciating the fact that once the funds are put into the business, they lose identity. 3. The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.56,35,500/- on account of Royalty payment without appreciating the fact that the said payment was made for the use of Trademark. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.” I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 4 Assessment year 2011-12: Assessee’s ground of appeal: “1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case. 2. The Learned Commissioner (Appeal) erred in not deciding ground no 2(d) as under: "The learned Assessing officer erred in fact and in law in not considering Nile Ltd as comparable in applying Transactional Net Margin Method on invalid ground that Nile Ltd is engaged in different kinds of activity i.e. glass lined equipment division, lead division and wind energy. " 3. The Learned Commissioner (Appeal) erred in disallowing Rs. 96,162/- on ad-hoc basis being 10% of the value of purchases from Glass Steel Parts and Services (Unit of Pfaulder Inc.). 4. The Learned Commissioner (Appeal) erred in disallowing Rs. 1,54,680/- on ad-hoc basis being 10% of the value of services received from Pfaulder Werke GMBH. 5. The Learned Commissioner (Appeal) erred in directing the A.O. to work out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis. 6. The appellant prays for appropriate relief on the above grounds of appeals. 7. The appellant craves leave to add, alter, amend, substitute, or withdraw any of the above grounds of appeal as circumstances may justify.” Additional Grounds of appeal: “Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT. 1. On the facts and circumstances of the case and in law, Both lower authorities erred in not allowing deduction of cess paid by the appellant I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 5 without appreciating fact that cess is revenue expenditure and same is not debarred by section 40(a)(ii) of the Act. Appellant craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal.” Department’s grounds of appeal: “1. The Ld.CIT(A) has erred in law and on facts in partly deleting upward adjustment made by the AO with regard to Arms length price without properly appreciating the facts of the case and the material brought on record. 2. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance made by the AO with regard to Royalty Expenses amounting to Rs.62,95,000/- without properly appreciating the facts of the case and the material brought on record. 3. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of provisions for differential warranty amounting to Rs.9,84,733/- without properly appreciating the facts of the case and the material brought on record. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 6. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.” Assessment year 2012-13: Assessee’s ground of appeal: “1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case. 2. The Learned Commissioner (Appeal) erred in not deciding ground no 2(e) as under: "The learned Assessing officer erred in fact and in law in not considering Nile Ltd as comparable in applying Transactional Net Margin Method on invalid ground that Nile Ltd is engaged in different kinds of activity i.e. glass lined equipment division, lead division and wind energy." I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 6 3. The Learned Commissioner (Appeal) erred in disallowing Rs. 23,287/- on ad-hoc basis being 10% of the value of purchases from Glass Steel Parts and Services (Unit of Pfaudler Inc.). 4. The Learned Commissioner (Appeal) erred in directing the A.O. to work out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis. 5. The appellant prays for appropriate relief on the above grounds of appeals. 6. The appellant craves leave to add, alter, amend, substitute, or withdraw any of the above grounds of appeal as circumstances may justify.” Additional Grounds of appeal: “Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT. 1. On the facts and circumstances of the case and in law, Both lower authorities erred in not allowing deduction of cess paid by the appellant without appreciating fact that cess is revenue expenditure and same is not debarred by section 40(a)(ii) of the Act. Appellant craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal.” Department’s grounds of appeal: “1. The Ld.CIT(A) has erred in law and on facts in partly deleting upward adjustment made by the AO with regard to Arms length price without properly appreciating the facts of the case and the material brought on record. 2. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of provisions for differential warranty amounting to Rs.26,20,000/- without properly appreciating the facts of the case and the material brought on record. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 7 3. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of education expenses amounting to Rs.35,97,769/- without properly appreciating the facts of the case and the material bought on record. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 6. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.” 3. We shall start with the assessment year 2010-11 as the lead assessment year. 3.1 We shall first take up assessee’s grounds of appeal. At the outset the counsel for the assessee submitted that he shall not be pressing for the additional grounds of appeal in relation to the grounds for deduction of cess paid by the assessee and the additional ground relating to proportionate adjustment in respect of international transaction with associated Enterprises in absence of segmental accounts. Accordingly the additional Grounds are being dismissed as being not pressed. Ground number 2: Exclusion of Nile Ltd as comparable in applying Transaction Net Margin Method (TNMM) 4. The brief facts in relation to this ground of appeal are that the assessee is engaged in the business of manufacturing corrosion resistant glass lined equipment used primary in chemical, pharmaceutical and allied industries. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 8 During the year under consideration, the assessee had entered into certain international transactions. The AO rejected the TP document on the ground that Nile Ltd cannot be considered as a comparable. Further, the assessee had selected cost plus method (CPM) as most appropriate method in some of the cases. The AO however rejected the CPM adopted by the assessee on the ground that in public databases as well as in the annual reports of the companies, the calculation of such gross profit margin was not available and therefore, the application of CPM can only be on estimated basis and no accurate calculation was possible. The AO, accordingly adopted TNMM method as the most appropriate method. Thereafter, he adopted return on total cost as profit level indicator (PLI) and also took Swiss Glass Coat Equipment Ltd. as the comparable and adopted profit margin of 13.27% on the operating cost of the company on entity level and made an adjustment of 1,83,53,946/- under section 92CA of the Act. 5. Before Ld. CIT(Appeals), the assessee submitted that the AO has not followed the due procedure while determining the ALP of the assessee’s transactions. The assessee objected to the determination of ALP under TNMM in respect of international transactions. He further objected to Nile Ltd being excluded from the list of comparables while computing ALP. Ld. CIT(Appeals) observed that the related party transactions for purchases are minor (less than 2%) as compared to the total direct and indirect cost. The Ld. CIT(Appeals) further observed that the AO has applied the TNMM on the total operating cost incurred by the assessee by taking PLI of 13.26%. However, the Ld. CIT(Appeals) observed that the transaction the assessee are in the nature of sale and purchase of equipment, rendering of service, I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 9 warranty etc. These transactions are not related and the nature of transaction itself shows that it cannot be said that the price of one transaction has been affected by the other transaction or group of transactions which have been termed as “international transactions”. Therefore, in these circumstances, Ld. CIT(Appeals) held that it would be unfair to club are all the transactions together and apply the TNMM to all transactions. The Ld. CIT(Appeals) observed that out of total of 17 international transactions, 7 transactions of the in the nature of purchase, 4 transactions are in the nature of sale of equipment and raw material, 3 international transactions are related to services receipt for which the payment has been made to the AE. The other transactions are royalty payment, commission received and interest income. Therefore, Ld. CIT(Appeals) held that it would be appropriate to examine each transaction separately and to decide whether the same is at arm’s-length or not. Accordingly, Ld. CIT(Appeals) examined each of the transactions undertaken by the assessee and in some cases made adjustments in respect of the same. The assessee is in appeal against us on the ground firstly, that Ld. CIT(Appeals) has not adjudicated on whether Nile Ltd. has been correctly expluded from the list of comparables while computing ALP and secondly, Ld. CIT(Appeals) has erred in disallowing and adding back certain percentage of sales/purchase on ad hoc basis. 6. Before us, the counsel for the assessee in respect of this ground of appeal submitted that Ld. CIT(Appeals) has erred in facts and in law in not adjudicating on the issue of why Nile Ltd. should be excluded from the list of comparables. The counsel for the assessee submitted that the assessee had given detailed submissions on this issue before the Ld. CIT(Appeals), I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 10 however, at the time of passing the order, Ld. CIT(Appeals) completely ignored the assessee’s submissions on this issue and proceeded to compute the ALP in respect of each of the individual international transactions undertaken by the assessee and made ad hoc disallowances @10% in respect of some of the transactions. The counsel for the assessee submitted that ALP in respect of international transactions cannot be accurately computed in absence of Nile Ltd. as a comparable company for the reason that firstly, in the assessee’s line of business there are primarily three important players: the market share of the assessee in this line of business is 54%, 27% of the business was with Swiss Glass Coats Equipment Ltd and the remaining 19% of the business was with Nile Ltd. Accordingly, in respect of international transaction in assessee’s line of business, ALP cannot be computed if Nile Ltd is to be excluded from the list of comparables. The AO excluded Nile Ltd on the ground that firstly, the assessee did not give the details of any search process carried out by him for selection of comparables and in the TP report the assessee gave names of only two comparables Swiss Glass Coats Equipments Ltd and Nile Ltd for the purpose of computation of ALP in respect of international transactions, secondly, Nile Ltd is functionally different from the assessee’s business since from the annual accounts of the company, it is seen that it is engaged in different kind of activities which have been classified into three divisions: glass lined equipment division, lead division and wind energy division, where the turnover of the glass lined equipment division is only 21% of the total turnover and consequently, this entity cannot be compared as comparable on the entity level with the assessee. The AO further observed that in respect of Nile Ltd, while the glass lined equipment division contributed 21% of the total revenue, the I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 11 utilisation of assets of this division is 43% of the total assets. Considering such disparity in the use of assets for different divisions, the AO held that it is not possible to reliably ascertain the adjustments which are required to be made to make this segment comparable to the assessee company. Accordingly, the AO rejected Nile Ltd as a comparable. The counsel for the assessee submitted that the AO has taken into consideration irrelevant considerations at the time of rejection of Nile Ltd. a comparable. The AO has not appreciated the fact that there are only three major players in this line of business and Nile Ltd therefore cannot be excluded from the list of comparables since it would make the whole exercise of determining ALP meaningless and inaccurate. The AO did not appreciate the fact that the basis on which he rejected Nile Ltd is extraneous and irrelevant to the instant set of facts and further, the AO has not brought forth other companies which could be taken as comparable once Nile Ltd is excluded, and the entire ALP was computed on the basis of one comparable company i.e. Swiss Glass Coats, which makes the whole exercise of computation of ALP erroneous and skewed. Further, Ld. CIT(Appeals) has omitted to completely consider this aspect in the appellate order. 7. In response, the DR relied upon the observations made by AO in his order. 8. We have heard the rival contentions and perused the material on record. From perusal of the records, we observe that Ld. CIT(Appeals) has not made any observation/conclusion in respect of this issue of exclusion of Nile Ltd. as a comparable company raised by the assessee. The assessee had I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 12 specifically raised this issue before Ld. CIT(Appeals), however, we observe from the records that the Ld. CIT(Appeals) has not made any observations on this issue on hand. We further observe from the records that the assessee for earlier years had worked out TNMM by including Nile Ltd as comparable and this working was not challenged by the AO in the assessment orders placed on record before us for assessment years 2007-08, 2008-09 and 2009-10. However, we equally note that the issue whether Nile Ltd should be taken as a comparable while computing TNMM was also never disputed/challenged by the Tax Department in any of the earlier assessment years on the ground that Nile Ltd had various divisions and there was disparity in asset use i.e. this glass line division of Nile Ltd was more capital intensive, and hence it is not functionally comparable to the assessee’s case . Though the Department has impliedly accepted Nile Ltd as a comparable while computing TNMM, but since the issue of segmental accounts was not raised / examined at any earlier point in time by the Department, it is not possible to ascertain whether the facts in respect of Nile Ltd as a comparable in the earlier years are same as compared to facts prevailing in the present year. The Department has raised the issue of comparability of Nile Ltd. as a comparable with the assessee for the first time during the year under consideration and in any of the earlier years, this issue was not considered or analysed by the Department. Further, though the assessee made factual and legal submissions on this issue before Ld. CIT(Appeals) in support of the acceptability of Nile Ltd as a comparable, however, he also inadvertently omitted to make any observation/given any findings in respect of the same in the appellate order. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 13 8.1 Accordingly, in our considered view, in the interests of justice, this ground is being restored to the file of Ld. CIT(Appeals) for adjudication on this aspect in light of the arguments put forward by the counsel for the assessee on this issue on whether it would be appropriate for Nile Ltd to be excluded as comparable, since as per the assessee it is one of the eminent players in this line of business and exclusion thereof would render the entire exercise of computation of ALP meaningless in the instant set of facts. 9. In the result, on this issue, the file is being restored to Ld. CIT(Appeals) for fresh adjudication after giving due opportunity of hearing to the assessee. 10. In the result, ground number 2 of the assessee’s appeal is allowed for statistical purposes. Ground Numbers 3 to 5 of the assessee’s appeal: 11. Ground Numbers 3 to 5 of the assessee’s appeal are related to ad hoc disallowance being 10% of the value of purchases from associated Enterprises, 10% of value of services received from Pfaulder Inc. and 10% of value of services received from Mavag AG. Since the issue for consideration in the above Grounds 3 to 6 is connected with ground number 1 of the assessee’s appeal, the same are also being restored to the file of the Ld. CIT(Appeals) for fresh adjudication in light of the findings made in respect of ground number 1 above. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 14 12. In the result, Ground Numbers 3 to 5 of the assessee’s appeal are allowed for statistical purposes. Ground number 6: ALP of loan given by the assessee to foreign subsidiary at the rate of interest Swiss Libor+200 basis points: 13. The brief facts in relation to this ground of appeal are that the assessee, during the course of business, had provided a loan to its wholly- owned foreign subsidiary in connection with acquisition of company situated in Switzerland, engaged in a similar business as that of the assessee company. On the said loan, the assessee had charged interest based on the market rate of Swiss Libor (CHF Libor) plus an additional spread margin of 1.25% per annum. However, the AO did not accept the ALP of the assessee and computed the ALP as per TNMM. In appeal before Ld. CIT(Appeals), the assessee submitted that since it had received the actual interest at more than the Swiss Libor rate, the ALP should not be more than the actual interest income and the computation of ALP under TNMM is not justified. The main contentions of the assessee were that: (i) the assessee has not given interest free loan (ii) the assessee has charged interest based on the market rate of Swiss Libor at the beginning of the quarter with additional spread margin of 1.25% per annum. The assessee has selected CUP method as the most appropriate method. The interest income of 31,35,469/- has been credited under the head income in the profit loss account (iii) the AO has computed ALP under TNMM without assigning any reason I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 15 The assessee submitted that where assessee is not in the business of granting loans, the arm’s-length interest rate is not the interest rate charged by the domestic bank as a comparable rate. The appropriate arm’s-length interest in such case would be Libor based on CHF Libor based interest rates. Since the assessee has charged interest more than the Swiss Libor rate, interest received is to be considered to be at arm’s-length. 14. In appeal, Ld. CIT(Appeals) partly allowed the assessee’s appeal with the following observations: “16. The transaction at Sr. No. 17 being receipt interest income from its AE has been explained by the appellant as at Arm's length price, as it has charged the interest rate by taking into account the Swiss LIBOR and an additional spread of 1.25%. The appellant has also produced quotation from Citibank which mentions the interest rate at Swiss LIBOR +150 bps. The claim of the appellant that it has charged more interest as compared to the Swiss LIBOR and, therefore, the transactions were at Arm's length is not acceptable. The appellant has not taken into account the effect of foreign exchange fluctuation and also the adequate spread which is normally considered in such type of loan transactions. It is further noted that the appellant has itself charged less interest rate by 25 bps as compared to what was quoted by Citibank. Therefore, to that extent the transition of interest is not at Arm's length price. The appropriate Arm's length margin for the loan would be Swiss LIBOR +200 basis points to take into account the spread as well as foreign exchange fluctuation risk. The AO is accordingly directed to work out the Arm's length price and make the addition. The ground of appeal is accordingly, partly allowed.” 15. The assessee is in appeal before us against the aforesaid additions made by Ld. CIT(Appeals). In the instant facts, we observe that the assessee has itself charged the lesser interest by 25 basis points (bps) as compared to what was quoted by Citibank. This fact was also observed by Ld. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 16 CIT(Appeals) in the appellate order. In view of the above, in the interest of justice, we are restricting the addition to interest rate at Swiss Libor plus 150 basis points, equivalent to the quotation obtained by the assessee from Citibank in respect of the said loan. 16. In the result, ground number 7 of the assessee’s appeal is partly allowed. Ground number 7: disallowance of 3,22,431/- being administrative expenses under section 14A of the Act: 17. The brief facts in relation to this ground of appeal are that the AO made disallowance under section 14A of the Act by applying the provisions of Rule 8D. The AO held that the funds of the assessee were mixed and the assessee had incurred certain expenditure for earning exempt income. AO accordingly made disallowance of 4,18,757/-. Before Ld. CIT(Appeals), the assessee submitted that he has substantial interest free funds, which far exceeded the investment made in shares and mutual funds. The assessee submitted that the investments in shares and mutual funds have been made from the bank account at Citibank at Mumbai and no borrowed funds have been transferred to that account. The new investments have been made from the redemption of investment in dividend income only. Regarding the administrative expenses, the assessee submitted that it has not incurred much expenditure and has itself disallowed an amount of 96, 326/- as per the audit report under section 44AB of the Income Tax Act. On perusal of the submissions and the records of the assessee, Ld. CIT(Appeals) accepted the assessee’s contention that the assessee has sufficient interest free funds for I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 17 making investments in shares and mutual funds. He further accepted that the assessee has been able to demonstrate that the funds for making the investments were separate and there is no mixing of fund. The investments in interest free funds were made from a bank account held in Citibank, Mumbai and the funds in that account were interest free. Further, the examination of the interest expenditure shows that such interest expenditure is in the relation to specific expenditure only and cannot be considered for making general disallowance out of interest by applying the Rule 8D. However, regarding the administrative expenses, the Ld. CIT(Appeals) observed that the assessee made disallowance of 96,326/ - in the return of income. It has a disallowed the staff salary and telephone expenses in proportion to the exempted total income. However, the Ld. CIT(Appeals) observed that the methodology adopted by the assessee is not scientific and further the assessee has not made disallowance on actual basis. The disallowance has been made on estimated basis in proportion to the income. Before Ld. CIT(Appeals), the assessee submitted that the Ld. CIT(Appeals) in assessment year 2009-10 has restricted the disallowance to the disallowance made by it in the return of income on the ground that no finding was given by the AO as to why the method adopted by the assessee for making the disallowance on estimated basis was incorrect. However, the Ld. CIT(Appeals) held that the administrative expenditure which needs to be disallowance has to be worked out in view of the provisions of Rule 8D and applying the same, he held that the disallowance made by the AO amounting to 3,22,431/ - is in accordance with Rule 8D in respect of administrative expenses and accordingly, the same is required to be disallowed. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 18 18. We observe that in the immediately previous assessment year 2009- 10, the ITAT vide order dated 06-09-2016 made the following observations in respect of disallowance of administrative expenditure towards exempt income: “11. From going through the above method we find that three limbs which in total arrives at the amount of disallowance 14A of the Act. In the first limb Id. Assessing Officer has made disallowance but the assessee has himself offered Rs.30,347 /- as disallowance towards specific expenditure for earning exempt income as observed by auditor as well as by ld. CIT(A) and we also accept the same. Going further towards disallowance under second limb relating to interest expenditure we find that as per the detailed submissions made by assessee before the lower authorities, the observation made by Id. CIT(A), decision of the Co- ordinate Bench in the case of assessee's own case in ITA No.318/Ahd/2011 (supra) and looking to the facts of the case that interest expenditure is only towards to the working capital limit specifically used for the purpose of business and assessee company having sufficient interest free funds, proves that only interest free funds have been used to invest in shares and mutual funds. Further we observe that is in conformity with the order of the Tribunal, deleting the entire disallowance u/s 14A of the Act on the ground that assessee had sufficient interest free funds out of which investment was made is in conformity with the judgment of Hon. Jurisdictional High Court in the case of Principal, CIT vs. India Gelatine and Chemicals Ltd. (supra). Respectfully following the judgment of Hon. Gujarat High Court in the case of Principal CIT vs. India Gelatine & Chemicals Ltd. (supra) and the observation made above, we find that no disallowance is called for in the second limb of rule 8-D relating to interest expenditure. Now coming to the third limb towards administrative cost to be calculated @ 0.5% of the average value of investment, we find that Id. CIT(A) has deleted this disallowance by observing that assessee had made specific disallowance of Rs.30,347/-, that dividend income of Rs.8,19,154/- assessee has reinvested Rs.3,26,406/- in the units of mutual funds and no satisfaction of the Assessing Officer in the assessment order as well as no finding that the assessee has incurred more than Rs.30,347/- 12. We observe that the third limb of the rule -8D of the Rules r.w.s. sec.14A of the Act has been brought into effect to cope up with situation where an assessee in the due course of running business makes huge investment in shares and mutual funds for earning exempt income in the form of dividend and long term capital I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 19 gain as well as short term capital gain subject to special rates. Certainly assessee has not specifically booked any expenditure towards administrative cost of huge investment in shares and mutual funds but one cannot ignore the cost of time used by various staff members as well as officers at the helm of affairs who are required to give sufficient energy to select various scrips and mutual funds and to invest into, selling off or switching off of the investments between various mutual funds arranging of funds out of the already invested funds as well as other services including idle business funds for use of banking services for the specific movement of funds round the year and more importantly towards safeguarding the investments against any possible losses. These all activities involve elements of cost of the company which being not calculable in general, are thus taken care of by third limb of Rule 8-D of the Rules r.w.s. 14A of the Act. 13. We further find that Id. CIT(A) in his order deleting the impugned addition has observed that out of the dividend income of Rs.8,19,154/- assessee has reinvested Rs.6,43,206/- and also has observed that long term capital gain of Rs. 14,55,875/- on account of redemption of mutual funds was taxable in nature. Therefore, in the given facts and circumstances of the case we are of the view that as against 0.5% of the average investment of Rs.11.35 crores working out at Rs. 5,67,450/- lump sum disallowance of Rs.2,50,000/- will be justified towards administrative cost incurred on maintaining investment in shares and mutual funds. Accordingly total disallowance of Rs.2,80,347/- (Rs.30,347/- + 2,50,000/-) is held to be disallowance u/s 14A of the Act. Accordingly the ground of Revenue is partly allowed. 18.1 Respectfully following the decision in the assessee’s own case for the immediately preceding assessment year 2009-10, as against disallowance of 0.5% of the average investment, which works out to 3,22,431/ - ,in our view, the disallowance may be restricted to a lump-sum disallowance of 250,000/-towards administrative cost incurred on maintaining investments in tax free funds. 19. In the result, the appeal of the assessee is partly allowed. Now we shall discuss the Departments appeal: I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 20 Ground number 1: deletion of upward adjustment of 1,83,53,946/- made on international transactions: 20. Since in the assessee’s appeal, we have restored the matter back to the file of Ld. CIT(Appeals) on whether Nile Ltd. should be included as comparable while computing the ALP in the assessee’s set of facts, Ground of Appeal No.1 of Department’s appeal would have to be adjudicated based on the outcome of the decision of Ld. CIT(Appeals) and accordingly, the same is not being adjudicated at this stage. Ground number 2: deletion 1,90,05,000/-made on account of interest expenditure under section 36 (1)(iii) of the Act: 21. The brief facts in relation to this ground of appeal are that the AO made disallowance out of interest paid by the assessee on the ground that the assessee had made investment in various subsidiaries on which no interest has been charged. The AO was of the opinion that the assessee had not furnished any evidence to prove that they are having interest-free funds and have made advances from those interest-free funds to its sister concerns. Accordingly, he disallowed the interest at the rate of 12% for the funds advanced interest-free by the assessee to its sister concerns. Before the Ld. CIT(Appeals), the assessee submitted that the amount has been given out of interest free funds available with the company. The assessee also submitted before Ld. CIT(Appeals) that from assessment years 2005-06 to 2009-10, the disallowances made by the AO have been deleted by Ld. CIT(Appeals). I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 21 In view of the above facts, the Ld. CIT(Appeals) allowed the assessee’s appeal, with the following observations: “On a careful consideration of the entire facts of the case, it is noted that the appellant had sufficient interest-free fund for making the investment and giving the interest-free advances. Further, the decision given by honourable Bombay High Court In the Case of Reliance Utilities [313 ITR 340], would also be applicable on the present set of facts as the interest free funds available with the appellant far exceeds the advances given to the subsidiaries. It is also noted that the interest expenditure that has been incurred by the appellant is of specific nature and it cannot be contended that it is on the funds which have been advanced to the sister concern. The issue of interest expenditure has been discussed by me in the preceding pages while deciding the issue of interest disallowance under section 14A. In view of these facts and circumstances, and also relying on the findings given by my predecessor in A. Y. 2009 - 10, the disallowance made by the AO under section 36(l)(iii) is directed to be deleted. The ground of appeal is accordingly allowed.” 22. On the basis of facts placed before us, we observe that this issue has been decided in favour of the assessee in the assessee’s own case before ITAT vide order dated 4 March 2019. The relevant act extracts of the order are been reproduced here in under for ready reference: “8. In ground no. 2, the Assessing Officer has raised the following grievance: The learned CIT(A) has erred in law and on facts in deleting the disallowance of Rs 1,90,05,000 made on account of interest expenses under section 36(l)(iii) of the Act without appreciating the fact that once the funds are put into business they lose their identity. 9. So far as this grievance of the Assessing Officer is concerned, the material facts are like this. During the course of assessment proceedings, it was noticed that the assessee has made investments of Rs 15,83,75,000 in various subsidiaries. It was contended that the assessee has sufficient interest free advances to make these investments. The Assessing Officer however brushed aside the plea and proceeded to compute interest @12%, on notional basis, on such interest free advances and allow the interest deduction under section 36(l)(iii) to that extent. Aggrieved, assessee carried the matter in appeal before the CIT(A) and the learned CIT(A), I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 22 following the view taken by him for the assessment year 2009-10, deleted the said disallowance. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 10. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in the matter as learned CIT(A)’s order for the assessment year 2009-10, based on which impugned relief was given, has since been confirmed by a coordinate bench vide order dated 6 th September 2016 and the learned Departmental Representative has dispute that material facts of the case are same. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 11. Ground no. 2 is thus dismissed.” 22.1 Respectfully following the decision in the assessee’s own case, which are concurring with the observations made by Ld. CIT(Appeals) in the appellate order as well, we are hereby dismissing the Department’s appeal on this issue. 23. Accordingly, ground number 2 of the Department’s appeal is dismissed. Grounds of Appeal No. 3 of Department’s appeal: deleting the addition of 56,35,500/- on account of royalty payment: 24. The brief facts of the case are that the AO made disallowance of royalty paid for the usage of trademarks to Pfaulder Inc. USA. The AO held that the assessee has not been able to explain the basis of royalty payment. The AO followed the findings given for assessment year 2009-10 and pointed out that no new facts have been brought on record by the assessee. In appeal, Ld. CIT(Appeals) allowed the assessee’s appeal with the following observations: I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 23 “The appellant on the other hand has submitted that the appellant company had the user right and no ownership is there with it. The payment of royalty was related to the sales made by use of technology supplied by the owner of the trademark. The use of trademark did not create any asset or permanent right in favour of the appellant. The agreement for using of trademark is for only seven years and the appellant has paid annual charges. It has also been pointed out by the appellant that the similar disallowance made in earlier years have been deleted by CIT(A), and honourable IT AT in A. Y. 2005 - 06 has also rejected departmental appeal on the issue. On a careful consideration of entire facts of the case, it is noted that the issue is covered in favour of the appellant by the orders of my predecessor in earlier year. It is also noted that the appellant is paying the Royalty on an annual basis and the same is linked to the sales made during the year. The appellant -has also deducted tax on the royalty payment. It is a recurring expenditure for the year. The appellant has not created any capital asset nor at it acquired any permanent right. In view of these facts and respectfully following the orders of my predecessor CIT(A) in earlier years, the disallowance made by the AO is directed to be deleted. The ground of appeal is accordingly allowed. 25. Before us, Ld. D.R. placed reliance on the observations made by the AO in the assessment order. In response, the counsel for the assessee submitted that the case is directly covered by the decision in the assessee’s own case for assessment year 2010-11 by ITAT vide order dated 4 th March, 2019 in ITA number 951 and 1370/Ahd/2015. 26. We have heard the rival contentions and perused the material on record. We observe that this issue is directly dealt with by the ITAT in the aforementioned case and the issue is decided in favour the assessee with the following observations: I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 24 “12. In ground no. 3, the Assessing Officer has raised the following grievance: The learned CIT(A) has erred in law and on facts in deleting the addition of Rs 56,35,500 on account of royalty payment without appreciating the facts that the said payment was made for the use of landmark. 13. So far as this disallowance is concerned, the Assessing officer noted that the assessee has made a royalty payment of Rs 75,10,000, but in the assessment years 2005-06 to 2009-10, the similar payments have been disallowed as capital expenditure. The Assessing Officer also noted that the CIT(A) has, in those years, allowed the claims in appeal but that fact did not impress the Assessing Officer, as he was of the view that the relief so granted by the CIT(A) is under challenge in appeal before the CIT(A). He, in line with the stand taken at the assessment stage in those years, treated the said expenditure as capital expenditure but allowed depreciation @ 25% on the same. The net disallowance was thus made at Rs 56,35,500. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 14. Having heard the rival contentions and having perused the material on record, we no reasons to interfere in the matter as learned CIT(A)'s order for the assessment year 2009-10, based on which impugned relief was given, has since been confirmed by a coordinate bench vide order dated 6 th September 2016 and the learned Departmental Representative has not been able to point out any material difference in the facts of the case of the said assessment year vis-a-vis the facts of the case of this year. As a matter of fact, there is no dispute that material facts of the case are same. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 14. Ground no.3 is thus dismissed. 26.1 Respectfully following the decision in the assessee’s own case, which are concurring with the observations made by Ld. CIT(Appeals) in the appellate order as well, we are hereby dismissing the Department’s appeal on this issue. 27. Accordingly, ground number 3 of the Department’s appeal is dismissed. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 25 Assessment year 2011-12 28. We observe that ground numbers 2, 3, 4 and 5 of the assessee’s appeal are similar to that of assessment year 2010-11 and the observations and conclusions for AY 2010-11 would apply to assessment year 2011-12 as well. 29. In the result, ground numbers 2, 3 and 4 of the assessee’s appeal are allowed for statistical purposes. Ground number 5 of the assessee’s appeal for assessment year 2011-12 is partly allowed. 30. The counsel for the assessee submitted that the additional Grounds in respect of allowability of deduction of cess paid by the assessee and in respect of adjustments in respect of international transaction with AE’s in absence of segmental accounts are not pressed. Accordingly, the addition grounds raised by the assessee for assessment year 2011-12 are dismissed as withdrawn. Department appeal for Assessment Year 2011-12: Ground number 1: deletion of upward adjustment made on international transactions: 31. Since in the assessee’s appeal, we have restored the matter back to the file of Ld. CIT(Appeals) on whether Nile Ltd. should be included as I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 26 comparable while computing the ALP in the assessee set of facts, Ground of Appeal No.1 of Department’s appeal would have to be adjudicated based on the outcome of the decision of Ld. CIT(Appeals) and accordingly, the same is not being adjudicated at this stage. Grounds of Appeal No. 2 of Department’s appeal: deleting the addition of 62,95,500/ - on account of royalty payment: 32. The facts of the case are similar to assessment year 2010-11. In light of observations / conclusion made by us for assessment year 2010-11 in the preceding paragraphs, we are hereby dismissing the Department’s appeal on this issue. 33. Accordingly, ground number 3 of the Department’s appeal is dismissed. Grounds of Appeal No. 3: deletion of disallowance of provision for differential warranty expense of 9,84,733/ - 34. The brief facts in relation to this ground of appeal are that the assessee had made provision for differential warranty of 9,84,733/ -, which was disallowed by the AO on the ground that the expenses claimed are yet to crystallise and are loaded with uncertainty of event which can give rise to the liability in future on occurrence of certain future event cannot be allowed as an expense. Further, the AO held that the assessee itself has submitted that the expenses for provision of warranty had not yet crystallised and the I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 27 provision for warranty expenses were made on the basis of past experience. Accordingly, the AO disallowed the same. In appeal, the Ld. CIT(Appeals) allowed the assessee’s appeal with the following observations: “8.3 The similar issue has been decided by Commissioner (Appeals)-2 in Assessment Year 2010-11 in appeal no. CIT(A)-2/DCIT/Cir.4/100/13-14 vide appellate order dated 13/02/2015. The findings given in said order are reproduced here under:- "I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made a disallowance of the provision of warranty made by the appellant in the profit and loss account. It has been held by him that the expenses were not crystallised and there was an element of uncertainty in the provision. The appellant on the other hand has submitted that the provision has been made on a systematic and scientific basis. The actual expenditure incurred during the year has been reduced and only the net provision has been made. It is further been pointed out by the appellant that the provision has been made is in accordance with the policies adopted by it in the preceding years. It has further been pointed out by the appellant that the disallowance made in A. Y. 200-10 has been deleted by the CIT(A) in that year. On a careful consideration of the entire facts of the case it is noted that the appellant has adopted scientific basis for making the provision for warranty. It is further noted that in A. Y. 2009 - 10 and earlier years the CIT(A) has deleted, the disallowance on account of provision of warranty for that year. Since the facts are similar in this year also the disallowance made by the AO is directed to be deleted. The ground of appeal is accordingly allowed." 35. We observe that this issue is directly covered in favour of the assessee in assessee’s own case for assessment year 2005-06 by Ahmedabad ITAT order in ITA number 2014/Ahd/2016, wherein the ITAT allowed the assessee’s appeal on this issue with the following observations: I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 28 6. We are of the considered view CIT(A) has correctly appreciated the fact in perspective in light the position of law properly as rendered by the Honourable Supreme Court in Rotork Controls India Private Limited (supra) and the Honourable Gujarat High Court in Hitachi home and life solution India Ltd (supra), without repeating the content of the order of the CIT(A) reproduce hereinabove, we see no reason to take a different view in the matter. We thus decline to interfere with the order of CIT (A). 35.1 Respectfully following the judgement of the ITAT in assessee’s own case for assessment year 2005-06 as reproduced above, we find no infirmity in the order of Ld. CIT(Appeals) and we hereby dismiss the Department’s appeal on this issue. 36. In the result ground number 3 of the Department’s appeal is dismissed. Assessment year 2012-13: Assessee’s Appeal: 37. We observe that ground numbers 2, 3 and 4 of the assessee’s appeal are similar to that of assessment year 2010-11 and the observations and conclusions for AY 2010-11 would apply to assessment year 2012-13 as well. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 29 38. In the result, ground numbers 2 and 3 of the assessee’s appeal are allowed for statistical purposes. Ground number 4 of the assessee’s appeal for assessment year 2011-12 is partly allowed. 39. The counsel for the assessee submitted that the additional Grounds in respect of allowability of deduction of cess paid by the assessee and in respect of adjustments in respect of international transaction with AE’s in absence of segmental accounts are not pressed. Accordingly, the addition grounds raised by the assessee for assessment year 2012-13 are dismissed as withdrawn. Department appeal for Assessment Year 2012-13: Ground number 1: Deletion of upward adjustment made on international transactions: 40. Since in the assessee’s appeal, we have restored the matter back to the file of Ld. CIT(Appeals) on whether Nile Ltd. should be included as comparable while computing the ALP in the assessee set of facts, Ground of Appeal No.1 of Department’s appeal would have to be adjudicated based on the outcome of the decision of Ld. CIT(Appeals) and accordingly, the same is not being adjudicated at this stage. Ground number 2: deleting disallowance of provision for differential warranty expense of 20,20,000/- I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 30 41. The facts and issues under consideration in respect of this ground are identical to assessment year 2011-12, and accordingly, our observations and conclusions for assessment a 2011-12 would apply to assessment year 2012- 13 as well. 42. Accordingly, ground number 2 of the Department’s appeal is dismissed. Ground number 3: deleting disallowance of education expense amounting to 35,97,769/ - 43. The brief facts in relation to this ground of appeal are that during the impugned assessment year, the assessee debited a sum of 35,97,769/ - in respect of management course of its director Mr Tarak A. Patel (including travelling expenditure of 8,74,159/-). The said expense was incurred for enhancing the knowledge and outlook of the director of the company by way of pursuing an extremely specialised educational course abroad. In the assessment proceedings, the AO disallowed the above expenses under section 37(1) of the Act. In appeal, Ld. CIT(Appeals) allowed the assessee’s appeal with the following observations: “7.3 I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed education expenditure on the ground that there is no nexus between business expenditure and profitability and income of the assessee. “7.3.1 The appellant on the other hand has submitted that Mr. Tarak Patel has been appointed as Executive Director from January 30, 2007. He has been granted approval by Board of Directors by Board Resolution dated 28 th April, I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 31 2011. Further it was decided that the company will bear 50% of the training programme and Mr. Tarak Patel shall sign an agreement with company that he will work with company for period of 3 years and in case he leaves early he should reimburse the expenses incurred in proportion to the years of services left. This education programrne has given better management skills, work efficiency etc. and which will act the profitability of the company in long time. Considering the indirect personal benefit to the director, the company has already recovered 50% expenditure. Further in case of CIT v. U.P. Asbestos Limited (2012) 83 CCH 0127 (All. HC) it is held that expenditure incurred by the company to send someone for training or higher education and after returning back in pursuance to contractual obligation, such person joins the company itself, then in such circumstances, it may not be treated as expenditure for personal reason because of relationship with an office bearer. Further assessee relied on ACIT v. M/s Mazda Ltd (I.T.A. No. 3190/Ahd/2008) (Ahm. ITAT) & Gujarat Carbon Industries Ltd v. ACIT (I.T.A. No. 3231/Ahd/2010) (Ahm. ITAT) which is in favour of assessee and cited by the appellant in its submission. : On a careful consideration of entire facts of the case, it is noted that the issue is covered in favour of the appellant. The amount of Rs. 35,97,769/- claimed by the assessee as education expenditure is an allowable expenditure. The disallowance made by the AO is directed to be deleted. The ground of appeal is accordingly, allowed.” 44. In appeal before us, DR relied upon the observations made by the AO in the assessment order. In response, the counsel for the assessee placed reliance on the observations made by Ld. CIT(Appeals) in the appellate order. He further placed reliance on several cases on this issue and submitted that the issue is directly covered in favour of the assessee in view of the above rulings. 45. We have heard the rival contentions and perused the material on record. We observe that in the case of Mallige Medical Centre (P.) Ltd.[2015] 61 taxmann.com 298 (Karnataka), the High Court held that I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 32 where daughter of managing director of assessee-company which was running a hospital was sent abroad for acquiring specialised knowledge in medical field and after acquiring same, she was working with assessee, expenses incurred towards daughter's education were to be allowed under section 37(1) of the Act. In the case of Ras Information Technologies (P.) Ltd.[2011] 12 taxmann.com 158 (Karnataka), the High Court held that money spent by an assessee either in sponsoring a student or towards educational expenses of a student in a discipline, in which assessee is carrying on its business, is a valid expenditure and is entitled to deduction. In the case of Kostub Investment Ltd.[2014] 45 taxmann.com 123 (Delhi), the High Court held that where expenditure on higher education of employee had an intimate and direct connection with assessee's business, it would be appropriately deductible, even though such an employee was son of a Director. In the case of Aswathanarayana & Eswara [2018] 97 taxmann.com 572 (Madras), the High Court held that expenditure by firm on partner's foreign education was to be allowed when post graduate course underwent was directly related to profession carried on by firm. In view of the above decisions and in light of the order passed by Ld. CIT(Appeals), we are of the considered view that in the instant set of facts, Ld. CIT(Appeals) has not erred in facts and in law in deleting the additions made by the AO, considering the facts of the present case. 46. Accordingly, ground number 3 of the Department’s appeal is dismissed. I.T.A Nos. 1370 & 951/Ahd/2015, 2003, 2827, 2212 & 2213/Ahd/2016 A.Y. 2010-11 to 2012-13 DCIT vs. GMM Pfaulder & GMM Pfaulder vs. DCIT 33 47. In the combined result, the appeals of the Assessee are partly allowed for statistical purposes and the appeals of the Department are dismissed. Order pronounced in the open court on 29-11-2022 Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 29/11/2022 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद