DCIT,Cir.-8, Pune V. Atlas Copco (India) Ltd., Pune

ITA 732/PUN/2011

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 6346 (ITAT-PUNE)
• Duration Of Justice: 8 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 01-08-2019
• Assessment Year: 2005-2006
• Appeal Filed On: 26-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARISE OUT OF
• Assessee Lawyers: AND OTHER
• Keywords: Gift; Business income; Depreciation; Transfer pricing; International transaction; Question of law; Corroborative evidences; Capital expenditure; Set aside
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER . / ITA NO.736/PUN/2011 / ASSESSMENT YEAR : 2005-06 ATLAS COPCO (INDIA) LIMITED, SVEANAGAR, DAPODI, PUNE 411 012 PAN : AAACA4074D VS. ACIT, RANGE-8, PUNE (APPELLANT) (RESPONDENT) . / ITA NO.732/PUN/2011 / ASSESSMENT YEAR : 2005-06 DCIT, CIRCLE-8, PUNE VS. ATLAS COPCO (INDIA) LIMITED, SVEANAGAR, DAPODI, PUNE 411 012 PAN : AAACA4074D (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND TH E OTHER BY THE REVENUE - ARISE OUT OF THE ORDER PASSED BY THE COMMI SSIONER OF INCOME-TAX (APPEALS)-V, PUNE ON 28-02-2011 IN RELATION TO TH E ASSESSMENT YEAR 2005-06. ASSESSEE BY SHRI R. MURLIDHAR & SHRI PRASHANT GANDHI REVENUE BY SHRI SANDIP GARG, CIT DATE OF HEARING 01-08-2019 DATE OF PRONOUNCEMENT 05-08-2019 ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 2 2. FIRST THREE GROUNDS TAKEN BY THE REVENUE IN ITS APPEAL ARE AGAINST THE DELETION OF TRANSFER PRICING ADDITION OF RS.3,50,0 6,690/- MADE BY THE ASSESSING OFFICER (AO) IN RESPECT OF ROYALTY P AYMENT MADE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES (AES). 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESS EE FILED ITS RETURN DECLARING TOTAL INCOME OF RS.43,04,85,517/-. SIX INTERNATIONAL TRANSACTIONS WERE REPORTED IN FORM NO.3CEB. THE AO MADE REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) F OR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS. THE TPO NOTICED THAT THE ASSESSEE PAID ROYA LTY FOR USE OF TECHNOLOGY AMOUNTING TO RS.3,50,06,690/- TO ITS ASSO CIATED ENTERPRISES (AES). THE ASSESSEE EMPLOYED TRANSACTIONAL N ET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DEMONSTRATING THAT THE TRANSACTION OF PAYMENT OF ROYALTY ALONG WITH OTHER TWO OTHER INTERNATIONAL TRANSACTIONS OF `IMPORT OF RAW MATERIALS AND COMPONENTS FOR MANUFACTURE OF FINISHED GOODS AND EXPORT OF MANUFACTURED FINISHED GOODS, WERE AT ALP. A T THIS STAGE, IT IS PERTINENT TO MENTION THAT QUA THE REMAINING THREE REPORTED INTERNATIONAL TRANSACTIONS OF COMMISSION RECEIVED; IMP ORT OF FINISHED GOODS FOR SALE IN THE DOMESTIC MARKET; AND PROVIS ION OF ENGINEERING DRAWING AND DESIGN SERVICES, THE ASSESSEE AGA IN APPLIED ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 3 THE TNMM AS THE MOST APPROPRIATE METHOD, BUT PROCESSED ALL O F THEM DISTINCTLY FROM EACH OTHER. INSTANTLY, WE ARE CONSIDERING THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROYALTY FOR USE OF TECHNOLOGY WHICH WAS PROCESSED BY THE ASSESSEE UNDER T NMM BUT BY AGGREGATING IT WITH THE FIRST TWO TRANSACTIONS OF IMPORT OF R AW MATERIALS AND EXPORT OF FINISHED GOODS. THE TPO OPINED THA T THE TRANSACTION OF PAYMENT OF ROYALTY, BEING, DIFFERENT IN NATURE AND CHARACTER FROM THE OTHER TWO TRANSACTIONS OF IMPORT OF RAW MATERIALS AND EXPORT OF MANUFACTURED GOODS, SHOULD BE BENCHMARKE D SEPARATELY AND CONSEQUENTLY THE AGGREGATION APPROACHED ADO PTED BY THE ASSESSEE FOR THESE THREE TRANSACTIONS WAS UNACCEPTABLE. IN DETERMINING THE ALP OF THE TRANSACTION OF PAYMENT OF ROYALTY, HE NOTICED THAT THE ASSESSEE PAID ROYALTY AT 5% ON DOMESTIC SALES AND 6% OF EXPORT SALES. ROYALTY OF RS.3.00 CRORE WAS PAID TO ATLAS COPCO AIRPOWER N.V. BELGIUM AND RS.49.89 LAKH TO ATLAS CO PCO DRILL AB, SWEDEN. IT WAS SEEN THAT THE ASSESSEE PAID ROYALTY TO THE SAME COMPANIES TO WHOM THE FINISHED GOODS WERE SOLD. AS THE ASSESSEE, IN THE OPINION OF THE TPO, COULD NOT PROVIDE ANY D ETAILS IN RESPECT OF COSTS INCURRED BY THE CONCERNED AES FOR THE D EVELOPMENT OF THE TECHNOLOGY PROVIDED TO THE ASSESSEE, HE DETERMINED NIL ALP OF THE TRANSACTION OF PAYMENT OF ROYALTY. THE AO MADE AN ADDITION OF THE EQUAL AMOUNT, WHICH CAME TO BE DELETED IN THE FIRST A PPEAL. ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 4 4. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. IT IS FOUND AS AN ADMITTED POSITION THAT THE ASSESSEE PAID ROYALTY TO ITS AES AS PER THE RATES APPROVED BY THE RBI. THE TPO DETERMINED NIL ALP SIMPLY ON THE GROUND TH AT THE AES TO WHOM THE ASSESSEE PAID ROYALTY HAD DISCONTINUED PRODUCTION OF SUCH PRODUCTS AND THE ASSESSEE WAS MAKING EXPORTS TO THEM ALSO. IN OUR CONSIDERED OPINION, SUCH REASONS ARE NOT GERMANE IN THE DETERMINATION OF THE ALP. THE TPO IS REQUIRED TO DETERM INE THE ALP OF AN INTERNATIONAL TRANSACTION UNDER ONE OF THE METH ODS MANDATED UNDER RULE 10B OF THE INCOME-TAX RULES, 1962. NOTHING OF THE SORT HAS BEEN DONE IN THE INSTANT CASE. THE TPO GOT INFLUE NCED WITH EXTRANEOUS REASONS, WHICH HAVE NO BEARING ON THE DETERMINATION OF THE ALP OF AN INTERNATIONAL TRANSACTION. IT IS FURTHER OBSERVED THAT SIMILAR ISSUE OF PAYMENT OF ROYALTY CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CA SE FOR THE EARLIER ASSESSMENT YEARS IN WHICH DELETION OF TRANSFER PRICIN G ADDITION ON PAYMENT OF ROYALTY BY THE LD. FIRST APPELLATE AUTHORIT Y HAS BEEN UPHELD. CONSIDERING THE ENTIRE CONSPECTUS OF THE C ASE, INCLUDING THE FACT THAT THE PAYMENT OF ROYALTY TO THE AES WAS A S PER RBI NORMS, WE ARE SATISFIED THAT THE VIEW TAKEN BY THE LD. CIT(A) IS UNASSAILABLE. THIS GROUND, THEREFORE, FAILS. ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 5 5. GROUND NO. 4 OF THE ASSESSEES APPEAL IS AGAINST THE CONFIRMATION OF TRANSFER PRICING ADDITION OF RS.2,24,11,726/ - IN THE INTERNATIONAL TRANSACTION OF `EXPORT OF MANUFACTURED FINISHED GOODS WITH TRANSACTED VALUE OF RS.50,95,90,294/-. THIS TRANSACTION WAS SHOWN BY THE ASSESSEE AT ALP UNDER THE TNMM IN AN AGGREGATE MANNER CONSIDERING TWO OTHER TRANSACTIONS INCLUDING PAYMENT OF ROYALTY, WHICH HAS BEEN DISCUSSED IN THE EAR LIER PART OF THIS ORDER. THE TPO OBSERVED QUA THIS TRANSACTION THAT NUMBER OF ITEMS WERE SOLD BY THE ASSESSEE TO AES AND NON-AES, WHIC H INCLUDED ELASTIC PINS, REGULATING ASSEMBLY, RUBBER PACKING, SPRINGS ETC. IT WAS SEEN FROM THE DETAILS FILED BY THE ASSES SEE IN ANNEXURE-1 THAT FOR THE SAME PRODUCT THE PRICE CHARGED F ROM AES WAS LESS THAN THAT CHARGED FROM NON-AES, GIVING A CUMULA TIVE DIFFERENCE OF RS.2,24,11,726/-. THE TPO, THEREFORE, R EJECTED THE APPLICATION OF TNMM ON AGGREGATE BASIS AND APPLIED THE COMPARABLE UNCONTROLLED PRICE (CUP) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THIS TRANSACTION. ON BEING CALLED UPON TO EXPLAIN ITS POSITION ON SUCH DIFFERENCE IN PRICES , THE ASSESSEE, INTER ALIA , SUBMITTED THAT THERE WAS A VAST DIFFERENCE IN THE QUANTITIES SOLD TO THE AES AND NON-AES. AS AGAINST EXPORT O F MANUFACTURED GOODS TO AES AT RS.50.96 CRORE, THE ASSESS EE SUBMITTED THAT IT MADE SALES TO NON-AES ONLY AT RS.5.25 CRORE. NOT ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 6 CONVINCED WITH THE ASSESSEES VERSION, THE TPO SEPARATED F IGURE OF EXPORTS IN RESPECT OF THE GOODS WHICH WERE ALSO SOLD TO N ON-AES AT RS.3.09 CRORE. THE REMAINING AMOUNT OF EXPORTS TO AES A T RS. 47.86 CRORE WAS ACCEPTED AT ALP. FOR THE DISPUTED TRANSAC TION OF EXPORTS MADE BY THE ASSESSEE TO ITS AE AT RS.3.09 CRORE, THE TPO FOUND THE ASSESSEE TO HAVE CHARGED ITS AES LESS BY RS.2 ,24,11,726/-. HE, THEREFORE, HELD THAT IF THE ASSESSEE HAD SOLD SUCH GOO DS TO THIRD PARTIES, THE AMOUNT OF SALES WOULD HAVE BEEN RS.5,33,87, 694/- (RS.3.09 CRORE + RS.2.24 CRORE). AS THE ASSESSEE DELIB ERATELY EXPORTED SIMILAR GOODS TO ITS AE AT PRICE LOWER THAN THAT CHAR GED FROM NON-AES, THE TPO HELD THAT THE LOWER AMOUNT CHARGED A T RS.2.24 CRORE WAS LIABLE TO BE CONSIDERED AS TRANSFER PRIC ING ADJUSTMENT. THE AO MADE THIS ADDITION, WHICH GOT SUSTAINED AT THE HANDS OF THE LD. FIRST APPELLATE AUTHORITY. 6. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. THE ASSESSEE DECLARED AN INTERNATIONAL TRANSACTION OF `EXPORT OF MANUFACTURED FINISHED GOODS WITH VALUE AT RS.50.95 CRORE, WHOSE ALP WAS DETERMINED BY THE ASSES SEE UNDER THE TNMM BY AGGREGATING IT WITH OTHER TWO INTERNATIONAL TRANSACTIONS OF `PAYMENT OF ROYALTY AND `IMPORT OF RAW MATERIALS AND COMPONENTS. THE TPO DID NOT ACCEPT THE AGGREGATION OF ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 7 TRANSACTIONS AND DETERMINED THE ALP OF PAYMENT OF ROYALTY SEPARATELY UNDER THE CUP METHOD. AS REGARDS THE TRANSACTION OF EXPORT OF SUCH MANUFACTURED FINISHED GOODS WHICH WERE A LSO EXPORTED TO THE NON-AES TO THE TUNE OF RS.3.09 CRORE, THE TPO APPLIED THE CUP METHOD BY CONSIDERING THE INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS OF THE SALES OF SIMILAR PRODUCTS MA DE BY THE ASSESSEE TO ITS NON-AES. THE TRANSFER PRICING ADDITION OF RS.2.24 CRORE IS ONLY IN RESPECT OF SUCH EXPORTED GOODS. 7. THE RAISON D`ETRE GIVEN BY THE TPO FOR RECOMMENDING THE TRANSFER PRICING ADDITION IS THAT THE ASSESSEE CHARGED HIGHER PRICES FOR SALE OF SIMILAR PRODUCTS FROM NON-AES. AS AGAINST TH AT, THE ASSESSEE CONTENDED BEFORE THE TPO THAT THERE WAS A VAST DIF FERENCE IN THE QUANTITY SOLD BY THE ASSESSEE TO ITS AES AND FURTHER THE ITEMS WERE SEPARATELY CUSTOMIZED FOR NON-AES. THE TPO HAS REFERRED TO ANNEXURE-1, WHOSE COPY HAS BEEN PLACED AT PAGE 559 ON WARDS OF THE PAPER BOOK. THE FIRST ITEM DEALT WITH IN ANNEXURE-1 IS E LASTIC PIN. SALE OF THIS PRODUCT MADE BY THE ASSESSEE TO ITS AE IN B ELGIUM IS AT THE AVERAGE RATE OF RS.11.52 PER UNIT WITH QUANTITY OF 2 855 UNITS AS AGAINST SALE OF 20 UNITS MADE TO A SRI LANKAN NON-A E, NAMELY, BOGALA GRAPHITE LANKA LTD. AT THE AVERAGE RATE OF RS.44 PER UNIT. IT IS THUS SEEN THAT THERE IS A SUBSTANTIAL DIFFERENCE IN THE ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 8 QUANTITY SOLD TO AE AND NON-AES. PRICE HAS BEEN LESS CHAR GED FROM AES WITH SALE OF HIGHER QUANTITY. SECOND ITEM IN THE ANNEXURE IS REGULATING ASSEMBLY. THE ASSESSEE SOLD ITS 100 UNITS TO NON -AE AT A PRICE OF RS.2658 PER UNIT AND 50 UNITS TO AE AT A PRICE OF RS.2683.80 PER UNIT. HERE, IT IS SEEN THAT THE POSITION HAS REVERSED IN AS MUCH AS THE ASSESSEE CHARGED HIGHER PRICE FROM ITS AE VIS-- VIS NON-AE ON THE SALE OF A LOWER QUANTITY TO AE. THE NEXT ITEM IS RUBBER PACKING. THE ASSESSEE SUPPLIED 10 UNITS OF THIS ITEM TO SRI LANKAN NON-AE AT RS. 23.25 PER UNIT AS AGAINST 1983 UNIT SUPPLIED TO ITS BELGIUM AE AT AN AVERAGE RATE OF RS.6.86 PER UNIT. T HERE IS SUBSTANTIAL DIFFERENCE IN RATES CHARGED AS WELL AS QUANTITY SU PPLIED. SALE OF HIGHER QUANTITY IS COUPLED WITH LOWER RATE. THE NEXT ITE M IS PLUNGER PIN. THE ASSESSEE SUPPLIED ITS 8 UNITS TO SRI LANKAN NON- AE AT A PRICE OF RS.29.92 PER UNIT AS AGAINST SUPPLY OF 6472 UNITS TO AE AT A PRICE OF RS.14.02 PER UNIT. SAME RESULT FOLLOWS THA T HIGHER THE QUANTITY, LOWER THE PRICE. THE NEXT ITEM IS REDUCER. THE ASSESSEE SUPPLIED 10 UNITS TO NON-AE AT A PRICE OF RS. 199 .02 PER UNIT AS AGAINST 78 UNITS TO ITS AE AT AN AVERAGE PRICE OF RS.2 36.22. HERE IT IS FOUND THAT THE PRICE CHARGED FROM AE IS MORE THA N THAT CHARGED FROM NON-AES EVEN FOR MORE QUANTITY. THE ENTIRE CASE IS LIKE THIS. NORMALLY, THE QUANTITY OF SALE OF SIMILAR PRODUCTS TO NON- AES IS SEVERAL TIMES HIGHER THAN THAT SOLD TO AES. ON AN O VERVIEW ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 9 OF ANNEXURE-1, IT IS FOUND THAT NO DOUBT THE ASSESSEE CHAR GED LESS PRICE FROM ITS AES VIS--VIS NON-AES, BUT SUCH LOWER PRICES ARE INVARIABLY CONJOINED WITH MUCH HIGHER NUMBER OF UNITS SOLD. I N CERTAIN CASES, THE ASSESSEE CHARGED ITS AES AT PRICES HIGHE R THAN THAT CHARGED FROM NON-AES FOR SIMILAR PRODUCTS. THE LD. AR EXPLAINED THAT THOUGH THE PRODUCTS ARE SIMILAR BUT THESE WERE CUSTOMIZE D AS PER THE REQUIREMENTS OF THE NON-AES, WHICH POSITION HAS NO T BEEN CONTROVERTED ON BEHALF OF THE REVENUE. THAT APART, IT IS S EEN THAT THERE IS DIFFERENCE IN LOCATIONS OF AES AND NON-AES. WHER EAS THE BIGGEST BUYER AE, NAMELY, POWER TOOLS DISTRIBUTION N.V. IS SITUATED IN BELGIUM; THE BIGGEST BUYER NON-AES, NAMELY, BOGA LA GRAPHITE LANKA LTD. IS SITUATED IN SRI LANKA. 8. RULE 10B(2) OF THE INCOME-TAX RULES, 1962 (HEREINA FTER ALSO CALLED `THE RULES) PROVIDES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED, INTER ALIA , WITH THE SPECIFIC CHARACTERISTICS OF PROPERTY TRANSFERRED, ALL THE CONDITIONS PREVAILING IN THE MARKETS IN WH ICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS. RULE 10B(3) EMPHATICALLY PROVIDES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFF ERENCES, ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 10 IF ANY, BETWEEN THE TWO ARE LIKELY TO MATERIALLY AFFECT THE PRICE CHARGED OR PAID ETC. AND FURTHER THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF S UCH DIFFERENCES. A CLOSE PERUSAL OF SUB-RULE (2) IN JUXTAPOSITION TO SUB- RULE (3) OF RULE 10B TRANSPIRES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION CAN BE PROPERLY DONE WITH A SIMILAR UNCONTROLLED TRANSACTION, IF THE LATTER HAS SIMILAR CHARACTERISTICS , CONTRACTUAL TERMS AND GEOGRAPHICAL LOCATIONS ETC. IN CASE, SO ME DIFFERENCES EXIST BETWEEN THE TWO SETS OF TRANSACTIONS, THEN, THE EFFECT OF SUCH DIFFERENCES SHOULD BE IRONED OUT BY GIVING A REASONABLE ADJUSTMENT IN THE PROFIT MARGINS ETC. 9. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THA T THOUGH DESCRIPTION OF ITEMS SOLD BY THE ASSESSEE TO ITS AE AND NON- AES IS SIMILAR, BUT THERE ARE SEVERAL DIFFERENCES IN THE TWO, SUCH AS, LOCATION OF THE PARTIES, QUANTITIES LIFTED AND CUSTOMIZATION OF PRODUCTS. SUCH DIFFERENCES HAVE SIGNIFICANT BEARING ON THE PRICE CHARGED BY THE ASSESSEE. NO ADJUSTMENT HAS BEEN ALLOWED BY THE TPO ON ACCOUNT OF SUCH DIFFERENCES. IN THE SAME MANNER, THE LD. DR ALSO COULD POINT OUT ANY MECHANISM FOR GIVING ADJUSTMENT ON ACCOUNT OF SUCH MATERIAL DIFFERENCES. IN SUCH CIRCUMSTANCE S, THE PRICE CHARGED FROM AES AND NON-AES CANNOT BE COMPARED UNDER THE ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 11 CUP METHOD. THE HONBLE JURISDICTIONAL HIGH COURT IN PR. CIT VS. AMPHENOL INTERCONNECT INDIA PVT. LTD. (2019) 410 ITR 373 ( BOM.) CONSIDERED ALMOST A SIMILAR SITUATION IN WHICH THERE WERE DIFFERENCES IN VOLUMES AND LOCATIONS AND THE TPO HAD APPLIE D THE CUP METHOD FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTION. THE TRIBUNAL DID NOT APPROVE THE APPLICATION OF TH E CUP METHOD ON ACCOUNT OF SUCH DIFFERENCE. WHEN THE REVEN UE PREFERRED AN APPEAL AGAINST THE TRIBUNAL ORDER, THE HONBLE HIGH COURT HELD THAT THE CUP METHOD IS NOT APPROPRIATE METHOD IN CASE OF GEOGRAPHICAL DIFFERENCE, VOLUME DIFFERENCE, TIMING DIFF ERENCE, RISK DIFFERENCE AND FUNCTIONAL DIFFERENCE. REVERTING TO FA CTS OF THE EXTANT CASE, WE FIND THAT SINCE THERE ARE SIGNIFICANT DIFFERENC ES IN THE SALES MADE BY THE ASSESSEE TO ITS AES AND NON-AES, THE EF FECT OF WHICH HAS NEITHER BEEN GIVEN BY THE TPO NOR IT HAS BEEN SHO WN THAT HOW IT CAN BE GIVEN, WE HOLD THAT THE ACTION OF THE AUTHORITIES B ELOW IN APPLYING THE CUP AS THE MOST APPROPRIATE METHOD CANNOT BE COUNTENANCED. 10. HAVING HELD THAT THE CUP IS NOT THE MOST APPROPRIATE METH OD IN THE GIVEN CIRCUMSTANCES, THERE IS A NEED TO DETERMINE THE A LP OF THE INTERNATIONAL TRANSACTION UNDER ANOTHER SUITABLE METHOD. TH E LD. AR VEHEMENTLY ARGUED THAT IN SUCH A SCENARIO OF THE TRIBUN AL NOT ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 12 APPROVING THE APPLICATION OF THE CUP METHOD BY THE AUTHORITIES , THE ALP DETERMINATION BY THE ASSESSEE UNDER THE TNMM WOULD REVIV E NOT CALLING FOR ANY TRANSFER PRICING ADDITION. THIS CONTENTION IN OUR CONSIDERED OPINION IS SANS MERIT. WE HAVE NOTICED ABOVE THA T THE ASSESSEE AGGREGATED THREE INTERNATIONAL TRANSACTIONS INCLUDING PAYMENT OF ROYALTY AND THE INSTANT TRANSACTION OF EXPORT OF MANUFACTURED FINISHED GOODS AND PROCESSED THEM UNDER THE TNMM ON AGGREGATE BASIS. THUS THE OPERATING PROFIT COMPUTED BY THE ASSESSEE UNDER THIS DETERMINATION HAD THE CUMULATIVE EFFECT O F THE OPERATING PROFIT FROM ALL THE THREE TRANSACTIONS. THE TPO DID N OT ACCEPT SUCH AGGREGATION. HE DETERMINED THE ALP OF THE PAYM ENT OF ROYALTY TRANSACTION SEPARATELY. THE LD. CIT(A) ALSO DEALT WITH THE DETERMINATION OF THE ALP OF ROYALTY PAYMENT SEPARATELY AND W E HAVE ALSO APPROVED THE ACTION OF THE LD. CIT(A) IN THIS REG ARD. THE ASSESSEE IS NOWHERE AGGRIEVED BY THE SEGREGATION OF ROYA LTY FROM THE AGGREGATED THREE INTERNATIONAL TRANSACTIONS. ONCE ONE OF THE THREE TRANSACTIONS IS TAKEN OUT FROM THE AGGREGATED THREE TRANSACTIONS, THE DETERMINATION OF ALP DONE BY THE ASSESSEE U NDER THE TNMM IN RESPECT OF SUCH THREE INTERNATIONAL TRANSACTIONS INCLUDING EXPORT OF MANUFACTURED FINISHED GOODS AND PAYMEN T OF ROYALTY, AUTOMATICALLY GETS DISTURBED AND CANNOT BE CONSTRUED AS GIVING A CORRECT PROFIT LEVEL INDICATOR OF THE DISTINCT INTERNATIONAL ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 13 TRANSACTION OF EXPORT OF MANUFACTURED GOODS SIMPLICITOR. N OT ONLY THE EFFECT OF PROFIT FROM THE TRANSACTION OF PAYMENT OF ROY ALTY NEEDS TO BE REMOVED FROM THE AGGREGATED PROFIT LEVEL INDICATOR OF THE ASSESSEE, EVEN THE COMPARABLES AND THEIR PLIS MAY ALSO U NDERGO CHANGE BECAUSE OF SUCH EXCLUSION. THUS, IT IS EVIDENT THAT TH E CONTENTION OF THE LD. AR IN THIS REGARD CANNOT BE ACCEPTED. U NDER THE PREVALENT CIRCUMSTANCES, THE ALP OF THE INTERNATIONAL TRANSA CTION OF EXPORT OF MANUFACTURED FINISHED GOODS IS REQUIRED TO BE SEPARATELY DONE. WE HAVE HELD ABOVE THAT THE CUP IS NOT THE MOST APPROPRIATE METHOD IN THE GIVEN CIRCUMSTANCES. IN SUCH A CONDITION, THERE IS A NEED FOR RESORTING TO ANOTHER SUITABLE METHOD FOR DETERMINING THE ALP OF INTERNATIONAL TRANSACTION OF EXPORT OF MANUFACTURED FINISHED GOODS. WE, THEREFORE, SET ASIDE TH E IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO/TPO FOR A FRESH DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTION OF EXPORT OF MANUFACTURED FINISHED GOODS BY THE ASSESSEE. I T IS, HOWEVER, MADE CLEAR THAT THE TRANSFER PRICING ADJUSTMENT, IF ANY, RESULTING FROM SUCH FRESH DETERMINATION OF THE ALP SHOULD BE RESTRICTED ONLY TO THE VALUE OF INTERNATIONAL TRANSACTIONS OF RS. 3.09 CRORE. THE OTHER PART OF THE INTERNATIONAL TRANSACTION OF EXP ORT OF MANUFACTURED FINISHED GOODS WITH THE VALUE OF RS.47.86 CR ORE, WHICH HAS BEEN ACCEPTED BY THE TPO AT ALP, CANNOT BE NOW ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 14 INTERFERED WITH. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDING S. 11 ANOTHER GROUND RAISED BY THE REVENUE IN ITS APPEAL IS AGAINST THE DELETION OF TRANSFER PRICING ADDITION OF RS.9.84 CRORE IN RESPECT OF INTERNATIONAL TRANSACTION OF RECEIPT OF INDENTING COMMISSION. 12. THE FACTUAL MATRIX OF THIS GROUND IS THAT THE ASSESSEE RECEIVED COMMISSION AMOUNTING TO RS.13,40,48,708/- FOR RENDERING MARKETING SERVICES TO ITS AE. THE ASSESSEE APPLIED SEPARATE TNMM IN RESPECT OF THIS INTERNATIONAL TRANSACTION AND SHOWED THAT THE RECEIPT OF COMMISSION WAS AT ALP. THE TPO OBSERVED THAT THE ASSESSEE EFFECTED SALES FOR ITS AES AMOUNTING TO RS.136.03 CRORE, AGAINST WHICH IT RECEIVED COMMISSION IN QUESTION. HE FURTHER NOTICED THAT APART FROM RENDERING MARKETING SERVICES TO ITS AES , THE ASSESSEE ALSO MARKETED ITS OWN PRODUCTS AND THE EXPENSES INCURRED FOR BOTH THE ACTIVITIES WERE COMBINED. HE, THEREFORE, HELD TH AT THE COMMISSION RECEIVED BY THE ASSESSEE FROM ITS AE SHOULD BE EQUAL TO THE PROFIT GENERATED BY IT FROM MARKETING OF OWN GOODS. HE COMPUTED THE ASSESSEES PROFIT BEFORE INTEREST AND TAX AT RS .69.79 CRORE. THE AMOUNT OF MANUFACTURING AND OTHER EXPENSES, INCLUSIVE OF MARKETING EXPENSES OF RS.40 CRORE, WAS FOUND AT RS. 75.28 CRORE. HE, THEREFORE, ATTRIBUTED PROFIT TO MARKETING FUNCTIONS AT RS.37 .08 ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 15 CRORE, THAT IS, RS.69.79/RS.75.28*RS.40 CRORE. THE ASSE SSEES TOTAL SALES WERE RS.422.99 CRORE. IN THIS WAY, THE TPO COMPUTE D PERCENTAGE OF MARKETING PROFIT TO SALES AT 8.75%. HE APPLIED SUCH 8.75% TO THE PRODUCTS SOLD BY THE ASSESSEE FOR ITS AES AT R S.136.03 CRORE TO FIND OUT THE MARKETING PROFIT FROM THE SALE OF AES PRODUCTS AT RS.11.92 CRORE ON PAGE 20 OF HIS ORDER. ALL EXPENSES INCURRED BY THE ASSESSEE ON SALE OF AES PRODUCTS AT RS.11.30 CRO RE WERE ADDED TO IT FOR WORKING OUT THE AMOUNT OF COMMISSION THAT THE ASSESS EE OUGHT TO HAVE EARNED AT ARMS LENGTH AT RS.23.22 CRORE. AS THE ACTUAL AMOUNT OF COMMISSION WAS RECEIVED ONLY AT RS.13.38 C RORE, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.9.84 CR ORE ON THIS COUNT. THE LD. CIT(A) OVERTURNED THIS PROPOSITION BY HOLD ING THAT THE TPO WAS NOT JUSTIFIED IN NOT CONSIDERING THE COST OF RA W MATERIAL AND DEPRECIATION FROM THE AMBIT OF TOTAL EXPENSES IN HIS CALCULATION. RELYING ON A TABLE DRAWN AT PAGE 27 OF THE IMP UGNED ORDER, THE LD. CIT(A) HELD THAT NO TRANSFER PRICING ADDITION WAS CALLED FOR. THE REVENUE IS AGGRIEVED BY THE DELETION OF THIS ADDITION. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROU GH THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE INTERNATIONAL TRANSACTION UNDER DISPUTE IS RECEIPT OF COMMISSION. THE ASSE SSEE ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 16 SOLD GOODS ON BEHALF OF ITS AES AND EARNED INDENTING COMMIS SION OF RS.13.40 CRORE. AS AGAINST THE ASSESSEE APPLYING THE TNM M, THE TPO HAS ALBEIT NOT REFERRED TO ANY SPECIFIC METHOD FOR DETER MINATION OF THE ALP OF THIS TRANSACTION, BUT APPEARS TO HAVE GONE WITH THE COST PLUS METHOD. RULE 10B(1)(C) OF THE I.T. RULES GIVES MODUS OPERANDI FOR DETERMINING ALP UNDER THIS METHOD, AS UNDER:- (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION I NCURRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SE RVICES PROVIDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED ; (II) THE AMOUNT OF A NORMAL GROSS PROFIT MARK-UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) A RISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PR OPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, I N A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANS ACTIONS, IS DETERMINED ; (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OT HER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SU CH PROFIT MARK-UP IN THE OPEN MARKET ; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (I) ARE IN CREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III) ; (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARMS L ENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVICES BY THE ENTERPRISE. 14. THE FIRST STEP UNDER THIS METHOD IS TO DETERMINE THE DIRE CT AND INDIRECT COSTS OF PRODUCTION INCURRED BY THE ENTERPRISE IN RES PECT OF SERVICES PROVIDED TO AN ASSOCIATED ENTERPRISE. THE TPO HA S WORKED ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 17 OUT THE AMOUNT OF SUCH EXPENSES INCURRED BY THE ASSESSE E ON SALE OF THE AES PRODUCTS AT RS.11.30 CRORE. THE SECOND STEP UN DER THIS METHOD TALKS OF FINDING OUT THE NORMAL GROSS PROFIT MARK-UP TO DIRECT AND INDIRECT COSTS IN A COMPARABLE UNCONTROLLED TRANSACTIO N. THIS IS WHERE THE TPO WENT WRONG. HE WAS REQUIRED TO WORK OUT THE NORMAL GROSS PROFIT RATE OF AN UNCONTROLLED TRANSACTION. THE TPO TOOK THE ASSESSEE ITSELF AS AN INTERNALLY COMPARABLE UNCONTROLLE D TRANSACTION AS AGAINST THE FACT THAT THE ASSESSEE HAD NOT REND ERED ANY MARKETING SERVICES TO ANY OUTSIDE PARTY FOR COMMISSION. WHE REAS THE TRANSACTION UNDER CONSIDERATION IS RECEIPT OF COMMISSION O N SALES, THE TPO FURTHER WENT AWRY BY CONSIDERING THE ASSESSE ES ENTITY LEVEL PROFIT, WHICH COMPRISE OF BOTH FROM THE MANUFACTUR ING & TRADING ACTIVITY AND ALSO RENDERING OF MARKETING SERVICES TO ITS AES. HE ARTIFICIALLY DEDUCED PROFIT FROM THE ALLEGED MARKETIN G ACTIVITIES OF THE ASSESSEE BY FIRSTLY CONSIDERING THE TOTAL PROFIT OF RS.69.79 CRORE; APPORTIONING IT TO THE MARKETING ACTIVITY AT RS . 37.08 CRORE BY CONSIDERING TOTAL EXPENSES OF RS.75.28 CR ORE VIS--VIS MARKETING EXPENSES OF RS.40 CRORE; COMPUTING PERCENTAGE O F MARKETING PROFIT TO SALES AT 8.75% BY TAKING THE FIGURES OF P ROFIT FROM MARKETING ACTIVITY AT RS. 37.08 CRORE AND SALES OF THE ASSESSEE AT RS.422.99 CRORE; AND THEN APPLYING THIS PERCENTAGE OF 8.75% TO THE PRODUCTS SOLD BY THE ASSESSEE FOR ITS AES AT RS.136.0 3 CRORE TO ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 18 FIND OUT ARMS LENGTH MARKETING PROFIT ON SALE OF AES PRODU CT AT RS.11.92 CRORE. THEN HE DETERMINED THE ARMS LENGTH PRIC E OF THE TRANSACTION AT RS.23.22 CRORE BY ADDING SUCH PROFIT RS. 1 1.92 CRORE TO THE COSTS INCURRED BY THE ASSESSEE IN RENDERING SERVICES AT RS.11.30 CRORE. AS THE TRANSACTION IS THAT OF EARNING COMM ISSION, IDEALLY, THE BENCHMARKING SHOULD ALSO HAVE BEEN DONE WITH REFERENCE TO AN UNCONTROLLED TRANSACTION OF EARNING COMMISSIO N ONLY. NOTWITHSTANDING THE FACT THAT THE TPO WAS REQUIRED TO TAKE THE COMPARABLE UNCONTROLLED TRANSACTION AS THAT OF RENDERING O F MARKETING SERVICES ALONE, HE STARTED WITH THE ENTITY LEVEL FIGURE S OF THE ASSESSEE WHICH ALSO INCLUDE SALE OF SELF GOODS OSTENSIB LY INVOLVING ALTOGETHER DIFFERENT FUNCTIONS, ASSETS AND RISKS VIS--VIS EARNING COMMISSION ON SALE FOR AES. THEREAFTER AGAIN, HE WENT OFF THE MARK BY EXCLUDING THE AMOUNT OF RAW MATERIAL COSTS ETC. AND DEPRECIATION FROM THE BASE OF TOTAL COSTS BY OVERLOOKING THE F ACT THAT THE FIGURE OF PROFIT TAKEN UP BY HIM ALSO INCLUDED PROFIT FR OM SALE OF MANUFACTURED GOODS. THE LD. DR WAS FAIR ENOUGH TO ACCEPT THAT THE AMOUNT OF DEPRECIATION OUGHT TO HAVE BEEN INCLUDED. EVE N IF WE PRESUME THE INITIAL STEP OF ADOPTION OF THE ENTITY LEVEL PROFIT OF T HE ASSESSEE, INCLUDING THAT FROM SALE OF SELF GOODS AS CORRE CT, WITH WHICH WE DO NOT OTHERWISE AGREE, THEN ALSO THE TOTAL COSTS CONTRIBUTING TO THE MANUFACTURING PROFIT SHOULD HAVE BEEN ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 19 CONSIDERED, WHICH OBVIOUSLY INCLUDE RAW MATERIAL COST AND DEPRECIATION, AS HAS BEEN HELD IN THE FIRST APPEAL. ON CONSID ERING THE POSITION IN THIS MANNER, THE LD. CIT(A), ON PAGES 27 AND 2 8 OF THE IMPUGNED ORDER, HAS FOUND THE ALP OF COMMISSION INCOME A T RS.13.79 CRORE AS AGAINST THE TRANSACTED VALUE OF COMMISSIO N INCOME AT RS.13.38 CORE, WHICH IS WITHIN PLUS MINUS 5% RANG E, NOT CALLING FOR ANY TRANSFER PRICING ADDITION. WE, THEREFORE, A CCORD OUR IMPRIMATUR TO THE VIEW TAKEN BY THE LD. CIT(A) ON THIS SCORE . THIS GROUND IS NOT ALLOWED. 15. GROUND NO.1 OF THE ASSESSEES APPEAL IS AGAINST THE CONFIRMATION OF DISALLOWANCE U/S.35DD OF THE ACT AT RS.2,10, 000/-, BEING, 1/5 TH OF THE FEES PAID TO REGISTRAR OF COMPANIES FOR INCREASING THE AUTHORIZED CAPITAL ON AMALGAMATION. 16. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THE INSTANT GROUND ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF THE PRECEDING YEARS, IN WHICH SIMILAR GROUND HAS BEEN ALLOWED IN FAVOUR OF THE ASSESSEE. FOLLOWING THE PRECEDENTS , WE ALLOW THIS GROUND OF APPEAL. ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 20 17. GROUND NO. 2 OF THE ASSESSEES APPEAL IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF RS.33,08,044/-, BEING, 40% OF EXPENSES ON PREMISES CONSIDERING THE SAME AS CAPITAL IN N ATURE. 18. HERE AGAIN, BOTH THE SIDES AGREE THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL AGAINST THE ASSESSEE IN ITS ORDER FO R THE A.Y. 2004-05. IN THE ABSENCE OF THE LD. AR POINTING OUT ANY DIFFERENCE IN THE FACTS OR LAW ON THIS ISSUE FOR THE INSTANT AND THE PRECEDIN G YEAR, FOLLOWING THE VIEW TAKEN FOR THE A.Y. 2004-05, WE UPHOLD TH E CAPITALIZATION OF EXPENSES IN RELATION TO THE PREMISES @ 40%. AT THE SAME TIME, IT IS DIRECTED THAT THE ASSESSEE BE ALLOWED DEPRECIA TION ON SUCH CAPITALIZED AMOUNT. 19. GROUND NO. 3 OF THE ASSESSEES APPEAL IS AGAINST THE DISALLOWANCE OUT OF MISCELLANEOUS EXPENSES. THE AO DISCUSS ED THIS ISSUE AT PAGE 2 ONWARDS OF HIS ORDER. HE OBSERVED THAT THE ASSESSEE CLAIMED DEDUCTION OF RS.11,13,64,581/- UNDER THE HEAD MISCELLANEOUS EXPENSES. THESE EXPENSES INCLUDED SOFTW ARE DEVELOPMENT EXPENSES OF RS.23,99,234/-; EXPENSES ON P REMISES AT RS.82,70,109/-. HE ALLOWED 50% DEPRECIATION ON SOFTWARE EXPENSES AND FOLLOWING HIS VIEW FOR THE PRECEDING YEAR, CAPITALIZED 80 % OF EXPENSES ON REPAIRS. SINCE NECESSARY DETAILS WERE NOT AVAILA BLE IN RESPECT OF THE REMAINING EXPENSES, HE DISALLOWED 20% OF SU CH ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 21 EXPENSES WHICH LED TO THE FURTHER ADDITION OF RS.1,94,57,96 4/-. THE ASSESSEE FURNISHED CERTAIN DETAILS BEFORE THE LD. CIT(A), W HO UPHELD THE DISALLOWANCE AT 20% OF THE REMAINING EXPENSES, AGAINST W HICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS PLACED BRE AK-UP OF TOTAL MISCELLANEOUS EXPENSES AT PAGES 69-70 OF THE PAPER B OOK. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL FOR EARLIER YEARS AS WELL. AFTER ALLOWING FULL DEDUCTION TOWARDS SOF TWARE EXPENSES AND FEES FOR HANDLING SHARE RECORD AND MAKIN G FULL DISALLOWANCE FOR WARRANTY EXPENSES, GIFTS AND DONATION, THE TRIBUNAL HAS RESTRICTED THE ADDITION TO 15% OF THE BALANCE E XPENSES. FOLLOWING THE SAME VIEW, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND DIRECT THE AO TO COMPUTE THE AMOUNT DISALLOWABLE OU T OF MISCELLANEOUS EXPENSES IN ACCORDANCE WITH THE DIRECTIONS GIVEN FOR THE IMMEDIATELY TWO PRECEDING YEARS ON THIS SCORE. 21. GROUND NO.5 OF THE REVENUES APPEAL IS AGAINST DELETIO N OF ADDITION OF RS.2,84,04,988/- MADE BY THE AO ON ACCOUNT O F COMMISSION. ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 22 22. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CLAI MED DEDUCTION FOR COMMISSION AMOUNTING TO RS.4,82,98,788/-. THE AO FOUND THAT SUPPORTING EVIDENCE WAS AVAILABLE ONLY FOR A SUM OF RS.1,98,93,800/-. THE REMAINING AMOUNT OF RS.2,84,04, 988/- WAS DISALLOWED BY THE AO. THIS ADDITION CAME TO BE DELETED IN THE F IRST APPEAL, AGAINST WHICH THE REVENUE HAS COME UP IN APPEAL B EFORE THE TRIBUNAL. 23. HERE AGAIN WE FIND IT IS AN ADMITTED POSITION THAT SIMILAR ISSUE HAS BEEN DETERMINED BY THE TRIBUNAL IN FAVOUR OF TH E ASSESSEE IN ITS ORDERS FOR THE A.YS. 2002-03 TO 2004-05. FOLLOWING THE SAME, WE COUNTENANCE THE IMPUGNED ORDER ON THIS SCORE. THIS G ROUND IS NOT ALLOWED. 24. GROUND NOS.6 AND 7 OF THE DEPARTMENTAL APPEAL ARE AGAINST THE DELETION OF DISALLOWANCE OF RS.14,40,373/- MADE BY THE AO BY HOLDING THAT THE PAYMENT OF VRS, TO THIS EXTENT, WAS NOT ELIGIBLE F OR DEDUCTION U/S.35DDA OF THE ACT. 25. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBU NAL IN ASSESSEES OWN CASE FOR EARLIER YEARS AS WELL. THE TRIBU NAL HAS HELD THE ASSESSEE TO BE ENTITLED TO DEDUCTION U/S.35DDA ON THE BASIS OF INCURRING OF LIABILITY. A FURTHER DIRECTION HAS BEEN GIVEN TO E NSURE ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 23 THAT THE ASSESSEE DOES NOT GET DEDUCTION ON ACTUAL PAYMENT BA SIS. THE IMPUGNED ORDER IS SET ASIDE TO THIS EXTENT AND THE MATTER IS REMITTED TO THE AO FOR ALLOWING DEDUCTION ONLY TOWARDS INCURRING OF LIABILITY, I.E. ON ACCRUAL OF LIABILITY TOWARDS VRS U/S.35DDA AND THAT NO AMOUNT SHOULD BE ALLOWED AS DEDUCTION ON PAYMENT BAS IS. 26. GROUND NO. 8 OF THE REVENUES APPEAL IS AGAINST ALLOWIN G DEDUCTION U/S.35DD OF THE ACT OF AMALGAMATION EXPENSES OF RS.47,50,536/- INCURRED BY THE ASSESSEE ON STAMP DUTY FOR TRANSFER OF IMMOVABLE ASSETS. 27. BOTH THE SIDES ARE CONSENSUS AD IDEM THAT SIMILAR ISSUE HAS BEEN DETERMINED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE IN EARLIER YEARS. FOLLOWING THE PRECEDENTS, WE DISMISS THIS GROUND OF A PPEAL BY THE REVENUE. 28. GROUND NO. 9 OF THE DEPARTMENTAL APPEAL IS AGAINST AL LOWING DEDUCTION TOWARDS PROVISION FOR WARRANTY AT RS.80,89,982/- . 29. BRIEF FACTS OF THIS GROUND ARE THAT THE ASSESSEE CLAIME D DEDUCTION TOWARDS PROVISION FOR WARRANTY AT RS.1,16,01,982 /-. THE AO OBSERVED THAT ACTUAL PAYMENT TOWARDS EXPENSES ON THIS C OUNT WAS ONLY RS.35,12,000/-. HE, THEREFORE, MADE DISALLOWAN CE FOR THE ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 24 REMAINING AMOUNT OF RS.80,89,982/-, WHICH CAME TO BE DELE TED IN THE FIRST APPEAL. 30. BOTH THE SIDES ARE FAIRLY AGREEABLE THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE SIMILAR TO THOSE OF EARLIER YEARS. THE TRIBUNAL HAS DISCUSSED THIS ASPECT IN PARA NO. 15 ONWA RDS OF ITS ORDER FOR THE A.Y. 2003-04 AND RESTORED THE MATTER TO TH E FILE OF THE AO HOLDING, INTER ALIA, THAT THE PROVISION FOR WARRANTY SHOULD BE ALLOWED AT 0.4% OF NET SALES AND FURTHER NO DEDUCTION SHOU LD BE ALLOWED FOR ACTUAL EXPENSES. AS THE FACTS ARE SIMILAR, WE D IRECT THE AO TO FOLLOW THE SAME COURSE OF DIRECTIONS TO THE EXTENT APPLICA BLE FOR THE YEAR UNDER CONSIDERATION. 31. THE ASSESSEE HAS RAISED THE FOLLOWING TWO ADDITIONAL GROU NDS : 1. CLAIM OF EDUCATION CESS : THE APPELLANT PRAYS THAT THE LIABILITY FOR EDUCATION CESS ON INCOME TAX PAID FOR THE YEAR OUGHT TO BE ALLOWED AS TAX DEDUCTIBLE EXPENSES WHILE COMPUTING THE TAXABLE INCOME. 2. CLAIM OF DEPRECIATION : CONSEQUENT TO THE DECISION OF HONBLE ITAT IN THE AY 2004 - 05, IN RELATION TO DISALLOWANCE OF EXPENDITURE OF PREMISE AMOUNTING TO RS.14,18,515, BEING 40% OF THE TOTAL EXPENDITURE INCURRED DURING THE YEAR, WHICH ARE HELD TO BE CAPITAL IN NATURE FOR SUCH YEAR UNDER CONSIDERATION, I.E. AY 2004-05, THE APPELLANT PRAYS FOR ALLOWANCE OF THE DEPRECIATION THE SAME, IN THE SUBSEQUENT YEARS, INCLUDING AY 2005-06. ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 25 32. THE HONBLE SUPREME COURT IN NATIONAL THERMAL POWER COMPANY LTD. VS. CIT (1998) 229 ITR 383 (SC) HAS OBSERVED THAT THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TA XING AUTHORITIES IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUN AL, IT IS FOUND THAT A NON-TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUC TION IS DENIED, WE DO NOT SEE ANY REASON WHY THE ASSESSEE SHOU LD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESP ECT OF THAT ITEM. ANSWERING THE QUESTION POSED BEFORE IT IN AFFIRMATIVE , THEIR LORDSHIPS HELD THAT ON THE FACTS FOUND BY THE AUTHORITIES BELOW A QUESTION OF LAW ARISES (THOUGH NOT RAISED BEFORE THE AUTHOR ITIES) WHICH BEARS ON THE TAX LIABILITY OF THE ASSESSEE AND THE TRIBUN AL HAS JURISDICTION TO EXAMINE THE SAME. HAVING GONE THROUGH THE SU BJECT MATTER OF THE ADDITIONAL GROUNDS TAKEN BY THE ASSESSEE, IT IS DISCERNIBLE THAT WHEREAS THE FIRST ADDITIONAL GROUND RAISES A PU RE QUESTION OF LAW AND THE SECOND IS CONSEQUENTIAL TO THE ORDER PASSED BY THE TRIBUNAL FOR THE A.Y. 2004-05. WE ARE, THEREFORE , ADMITTING SUCH ADDITIONAL GROUNDS AND ESPOUSING THEM FOR DISPOSAL ON MERITS. ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 26 33. IN RESPECT OF ADDITIONAL GROUND NO.1, THE LD. AR CONTE NDED THAT EDUCATION CESS ON INCOME-TAX PAID FOR THE YEAR SHOULD BE ALLOWED AS DEDUCTION. IN SUPPORT OF HIS CONTENTION, HE RELIED ON THE JUDGMENT OF HONBLE RAJASTHAN HIGH COURT IN CHEMBAL FERTILIZERS LTD. AND ANOTHER AND VS. JCIT AND ANOTHER (2018) 102 CC H 0202 RAJ-HC IN WHICH IT HAS BEEN HELD THAT EDUCATION CESS IS NOT DISALLOWABLE U/S.40(A)(II) OF THE ACT. THIS GROUND WAS NOT SE RIOUSLY RESISTED ON BEHALF OF THE REVENUE. 34. WE HAVE HEARD THE SUBMISSIONS. IT IS SEEN THAT RELY ING ON CIRCULAR F. NO. 91/58/66-ITJ(19) DT. 18TH MAY, 1967, THE H ONBLE RAJASTHAN HIGH COURT IN CHAMBAL FERTILISERS AND CHEMICALS LTD. (SUPRA) HAS HELD THAT EDUCATION CESS IS NOT DISALLOWABLE U/S 40(A)(II) OF THE ACT. THE SAID JUDGMENT HAS ALSO BEEN FOLLOWE D BY THE PUNE BENCH OF THE TRIBUNAL IN DCIT VS. BAJAJ ALLIANZ GENERAL INSURANCE COMPANY LTD. (ITA NO. 1111/PUN/2017) VIDE ITS ORDER DATED 25.7.2019, A COPY OF WHICH HAS BEEN PLACED ON RE CORD BY THE LD. AR. NO CONTRARY PRECEDENT HAS BEEN BROUGHT TO OUR NO TICE BY THE LD. DR. FOLLOWING THE PRECEDENT, WE ALLOW THIS ADDITIONAL GROUND O F APPEAL. 35. THE SECOND ADDITIONAL GROUND IS AGAINST THE ALLOWING OF DEPRECIATION ON THE AMOUNT OF CAPITAL EXPENDITURE INCURRED BY THE ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 27 ASSESSEE ON CERTAIN PREMISES, WHICH WAS PARTLY HELD BY THE TRIBUNAL TO BE NOT DEDUCTIBLE IN ITS ORDER FOR THE A.Y. 2004-05. 36. WE HAVE GONE THROUGH THE RELEVANT DISCUSSION MADE IN PARA 16 OF THE TRIBUNAL ORDER DATED 22-07-2019 IN ITA NO.1302/PU N/2010 FOR THE A.Y. 2004-05 IN WHICH THE TRIBUNAL NOTICED THAT THE ASSESSEE PURCHASED A PROPERTY DURING THE YEAR AND CARR IED OUT SUITABLE REPAIRS/RENOVATION TO MAKE IT FIT FOR USE. THE DECISION OF THE LD. CIT(A) CAPITALIZING 40% OF THE EXPENDITURE AS AGAINST 80% DONE BY THE AO, WAS APPROVED BY THE TRIBUNAL. ONCE A PARTICU LAR AMOUNT HAS BEEN HELD TO BE CAPITAL EXPENDITURE ON A BUILDING PURCHASED BY THE ASSESSEE, THE SAME HAS TO BE SUBJECTED TO DEPRECIATION. AS THE TRIBUNAL HAS APPROVED THE CAPITALIZING OF CERTAIN AMOUNT TO BUILDING ACCOUNT, WE, THEREFORE, DIRECT THE A O TO ALLOW DEPRECIATION ON SUCH AMOUNT AS PER LAW. 37. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOW ED AND THAT OF THE REVENUE IS ALSO PARTLY ALLOWED FOR STATISTICAL PURPOS ES. ORDER PRONOUNCED IN THE OPEN COURT ON 05 TH AUGUST, 2019. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 05 TH AUGUST, 2019 ITA NO.736 & 732/PUN/2011 ATLAS COPCO (INDIA) LIMITED 28 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-V, PUNE 4. 5. 6. THE CIT-V, PUNE , , / DR C, ITAT, PUNE; / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 01-08-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 05-08-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *