Income Tax Appellate Tribunal - Kolkata
Sika India Pvt. Ltd., Kolkata vs Dcit, Cir-12(2), Kolkata, Kolkata on 30 October, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
KOLKATA 'C' BENCH, KOLKATA
(Before Sri J. Sudhakar Reddy, Accountant Member & Sri S.S. Viswanethra Ravi, Judicial Member)
ITA No. 575/Kol/2015
Assessment Year: 2010-11
&
ITA No. 911/Kol/2016
Assessment Year: 2011-12
Sika India Pvt. Ltd.........................................................................................................................Appellant
Commercial Complex-II
620, Diamond Harbour Road
Kolkata - 700 034
[PAN : AAECS 1119 F]
Vs.
Deputy Commissioner of Income Tax, Circle-11(2), Kolkata.........................................Respondent
Appearances by:
Shri Himanshu Sinha, Advocate, appeared on behalf of the assessee.
Dr. P.K. Srihari, CIT Sr. D/R, appearing on behalf of the Revenue.
Date of concluding the hearing : July 31st, 2019
Date of pronouncing the order : October 30th, 2019
ORDER
Per J. Sudhakar Reddy, AM :-
Both these appeals filed by the assessee are directed against the order of Assessing Officer passed, u/s 143(3)/144C(1) of the Income Tax Act, 1961 (the 'Act'), dt. 28/02/2015, for the Assessment Year 2010-11 and passed u/s 143(3)/144C(5) of the Act, dt. 29/02/2016, for the Assessment Year 2011-12.
2. Sika, a Swiss group founded in Zurich in 1910, is active in the field of specialty chemicals. Sika is one of the leading suppliers of construction chemicals and industrial adhesives. Sika is engaged in processing materials used in sealing, bonding, damping, reinforcing and protecting load-bearing structures in construction and other industries. The operations of Sika are divided into two business segments - construction division and industry division The construction division deals in products and solutions for construction, elastic bonding & sealing, industrial flooring, structural strengthening, waterproofing, etc, while the industry division is a leading supplier of chemical process material for customer-oriented solutions in transportation and manufacturing industries. While on the technical side, these two business areas are closely linked, on the commercial side they cater to different markets. The technological affinities permit economies of scale in the areas of R&D, purchasing and production. The Sika Group as a 2 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 whole has a worldwide presence with subsidiaries in 70 countries and 12,000 employees. The Group as a whole has achieved annual sales of CHF 4.2 billion for the year ended 31st December 2009.
We first take up ITA No. 575/Kol/2015; which is the appeal for the Assessment Year 2010-11
3. The issues that arises for our adjudication are adjustment made by the TPO to the international transactions of (1) payment of royalty and import of raw material (combined transactions) and (2) payment for intra group services. There is no dispute as regards other international transactions pertaining to (a) import of furnished goods
(b) provision for contract R& D services (c) payment of interest on loan and (d) re re-
imbursement of expenses.
The assessee has also disputed the disallowance made by the Assessing Officer with regard d to (a) payment of lease premium (b) payment on account of leave encashment. It also submits that the benefit of set off of brought forward losses and unabsorbed depreciation has not been granted.
5. We have heard rival contentions. On careful considerati consideration on of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:
follows:-
6. Ground No. 1 is general in nature.
7. Ground No. 2 to 8 are on the issue of adjustment relat relating ing to payment of royalty.
Both the parties submitted that an identical issue has come up before the Kolkata Bench of the ITAT in the assessee's own case for the Assessment Years 2006-07 2006 to 2008-09.
The Tribunal while adjudicating the issue in ITA Nos. 2012/Kol/2010, 2/Kol/2010, ITA No. 993/Kol/2011 and ITA No. 224/Kol/2013 held as follows:-
8. We first take up the issue of royalty. The royalty agreement provides for the following:
following:-
a) Transfer of exclusive right for the manufacture of products either manufactured (partially lly or entirely) by Sika India or manufactured by any of the Sika Group of Companies.3 ITA No. 575/Kol/2015
Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12
b) To make available of present and future knowhow necessary for application of sale either manufactured (partially or entirely) by Sika India or manufactured by any of the Sika Group of Companies.
c) A grant of exclusive rights to use the trade mark in relation to the products either manufactured (partially or entirely) by SI or manufactured by any of the Sika Group of Companies.
8.1. Thus, the royalty is being paid for exclus exclusive ive rights for manufacturing, making available present and future knowhow necessary for manufacture and for exclusive rights to use the trade mark, in relation to the products of Sika Group of Companies.
8.2. In our view, such payments of royalty cannot b bee bundled with transactions of import of furnished goods, import of raw materials, service under IT Service agreement etc. and TNMM at entity level be applied as the MAM. When finished goods are imported and sold, we do not see any justification in bundlingg royalty along with other international transaction. For availing of service, TNMM is used and again benchmarked separately.
The Delhi Bench of the Tribunal in the case of Gruner India Pvt. Ltd. vs. DCIT (supra), has dealt with this issue at para 4 up to para 5.9 of its order, which is extracted hereinbelow:-
hereinbelow:
"4.
4. We have heard the rival submissions and perused the relevant material on record. It is manifest from the above discussion that the assessee demonstrated all the eight international transactions aatt ALP on a combined basis under the TNMM. The TPO has disputed only the transactions of payment of Royalty and Fees for technical services, whose ALP has been determined under the CUP method, thereby impliedly accepting the remaining six international tran transactions sactions at ALP under the TNMM.
I. Whether segregation of the two transactions is justified?
5.1. The first issue raised by the ld. AR is against the separate determination of ALP of the international transactions of payment of royalty and fees for technical services. He urged that these two international transactions ought to have been considered along with other international transactions in an aggregated manner under the TNMM as was done by the assessee. Relying on certain Tribunal orders, it was argued that the authorities below were not justified in segregating these two transactions for determining their ALP under CUP method. This contention was strongly opposed by the ld. DR who submitted that there was no relation between payment of royalty andd fees for technical services and other international transactions of import of raw materials, export of finished goods, lease of machine/tools, purchase of plant and machinery, dividend paid and testing and celebration fees received. In his opinion, these two transactions were required to be separately benchmarked as has been done by the TPO.
5.2. The key question which, therefore, falls for our consideration is whether the segregation of these two transactions of payment of Royalty and Fees for technical services from the other international transactions, is justified?
5.3. The Hon'ble jurisdictional High Court in Sony Ericson Mobile Communication India Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del), has dealt with the circumstances in which aggregation can be done in the context of AMP expenses. The principles laid down in this case are universally applicable and are not confined to the peculiar facts of that case alone. It has been held that 'transaction includes the number of closely linked transactions.' Dealing with AMP expenses, it held vide paras 80 and 81 that inter-connected connected international transactions can be aggregated and section 92(3) does not prohibit rohibit the set off. Further, in paras 91, 121 and others, it held that the ALP of AMP expenses should be determined preferably in a bundled manner with the 4 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 distribution activity. Vide paras 194 (i), (ii), (viii) and others it held that for determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses should be chosen. It still further held in paras 100, 121, and 194 (iii), (vi) and (xi) that if adjustment is not possible or comparables are not available, then, TNMM on entity level should not be applied and the international transaction of AMP should be viewed in a debundled or a segregated manner. In separately determining the ALP of the AMP expenses, the Hon'ble High Court held that the TPO is free to choose any other suitable method and in making TP adjustment on account of AMP expenses, appropriate set off/purchase price adjustment should be allowed from the other transaction of di distribution stribution of the products. The Hon'ble High Court also held in page 92 of its judgment that 'it would not be proper and appropriate to apply the TNMM method in case the Indian assessed is engaged in manufacturing activities and distribution and marketing of imported and manufactured products as interconnected transactions. Import of raw material for manufacture would possibly be an independent transaction viz., marketing and distribution activities or functions.' A careful perusal of the judgment of the Hon'ble n'ble jurisdictional High Court divulges that though a number of closely linked transactions can be aggregated, but, the transactions which are not closely related to each other would require determination in a segregated manner.
5.4. The Hon'ble Punjab & Haryana High Court in Knorr Bremse India P. Ltd. vs. ACIT (2016) 380 ITR 307 (P&H), has held that in case of a package deal where each item is not separately valued, but, all are given a composite price, this should be considered as one international tran transaction saction and processed accordingly for the transfer pricing purpose. It further held that where a number of transactions are priced differently, but, on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e., either take all or leave all), then also, the separate transactions be considered as one international transaction. In such circumstance, burden has been placed on the assessee to prove that although each transaction is priced separately, but, they were p provided rovided under one common understanding. It further laid down emphatically that : ` the contention that as the services and goods are utilized by the assessee for the manufacture of the final product they must be aggregated and considered to be a single tra transaction nsaction and the value thereof ought to be computed by the TNMM is not acceptable. Merely because the purchase of each item and the acceptance of each service is a component leading to the manufacture/production of the final product sold or service provide provided by the assessee, it does not follow that they are not independent transactions for the sale of goods or provision of services. The end product requires several inputs. The inputs may be acquired as part of a single composite transaction or by way of seve several independent transactions. In the latter case, the sale of certain goods and/or the provision of certain services from out of the total goods purchased or services availed of by an assessee together can form part of a separate independent international transaction. In such an event, the AO/TPO must value this group of sale or purchase of goods and/or provision of services as separate transactions.' 5.5. When we consider the ratio decidendi of the above referred two judgments, the picture which emerges iiss that although closely related transactions can be aggregated, but, unrelated transactions cannot be clubbed for determining ALP on a combined basis. The relevant criteria to determine whether certain transactions be considered as one international transa transaction ction or not is to see if such transactions were entered into a package deal or were intended to be simultaneously accepted or these are so closely linked that one cannot at all stand without the other. If the above criteria is satisfied, then, two or more related transactions can be considered as one international transaction for the purpose of determining their ALP. On the contrary, 5 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 if the above criteria is not satisfied, then, these transactions are to be viewed separate from each other and, accordingly, their ALP should also be determined in a distinct manner as if these are two separate independent transactions. The mere fact that both the intra intra-group group services and goods are utilized by the assessee for the manufacture of the final product, cannot be tre treated ated decisive to consider such separate transactions as a single transaction.
5.7. Adverting to the facts of the instant case, we find that that the assessee entered into an Agreement with its AE, namely, Gruner AG, a German company, on 6th of March, 2009,, a copy of which has been placed on pages 167 onwards of the paper book. Under this Agreement, the assessee was granted a licence permitting use of technology and technical knowknow-how how in the field of electro mechanical components and also the brand name of its foreign AE. In lieu of such use of technical know-how know and brand name, the assessee became liable to pay a licence fees and royalty as stated in Schedule II to this Agreement. This Schedule provides for payment of royalty and fees for technical services each @ 8% calculated on the basis of the net ex- ex factory sale price of the product, exclusive of excise duty minus the cost of the standard bought out components and the landed cost of imported components, irrespective of the source of procurement, includi including ng ocean freight, insurance, custom duties, etc. Apart from this Agreement, the assessee also entered into another Agreement dated 25.6.2009 with Gruner AG, Germany, for availing certain Management services. A copy of such Agreement is available on page 10 107 onwards of the paper book. Under this Agreement, the assessee agreed to pay at the hourly rates. It is the payment pursuant to the Agreement dated 25.6.2009 and 8% fees for technical services under the Agreement dated 6.3.2009, that the assessee paid tot total fees for technical services at Rs.4.72 crore. Royalty payment @ 8% made to Gruner AG, under the Agreement dated 6.3.2009, stands at Rs.3.24 crore. Thus it is palpable that the assessee paid royalty and fees for technical services to its AE pursuant to tthe Agreements which are solely for this purpose. There is no reference or mention whatsoever of any other international transactions undertaken by the assessee during the year in these Agreements. It is further found that the international transactions of import of raw material and export of finished goods along with lease of machine/tools and purchase of plant and machinery, etc., have no link with payment of royalty and payment of fees for technical services. The two international transactions of payment of royalty and fees for technical services are altogether independent from the international transactions of import of raw materials, etc. The ld. AR vehemently harped on the fact that royalty and fees for technical services was paid by the assessee on the basis of import of raw material and, hence, these transactions should be considered along with the other international transactions including import of raw materials, spares and consumables. We are afraid that this contention is not correct. We have discu discussed ssed hereinabove that the Agreement dated 6.3.2009 provides for payment of royalty and fees for technical services: 'calculated on the basis of the net exex-factory factory sale price of the product, exclusive of excise duty minus the cost of the standard bought out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.' Thus, it is manifest that royalty and fees for technical services is payable by the assessee on sale price net of excise duty and import of raw material, etc. To put it simply, such payment of royalty and fees for technical services @ 8% is only on `value addition'. There may be total import of goods worth Rs.100/ Rs.100/-. However, royalty and fees for technicall services will be paid only on the sale price of goods as reduced, inter alia, by import of the corresponding raw materials, etc. If, during a particular year, raw material, etc., are consumed worth Rs.60/-,, the remaining Rs.40/ Rs.40/- will be in stock. In such a situation, royalty and fees for technical services will be paid with reference to the amount of sale price as reduced, inter alia, by Rs.60/ Rs.60/-.. The essence of the matter is that royalty and fees for technical services is required to be calculated on the basis of ex factory sale price of 6 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 the goods as reduced by the expenses and not on import of raw materials. It is further pertinent to note that the assessee is not obliged to make 100% purchases and sale to its AEs alone. The assessee is free to purchase rraw aw materials and other components from and also sell its goods to its non non-related related parties as well. This explicitly proves that the payment of royalty and fees for technical services has relation with the total sales made by the assessee and it cannot be co construed nstrued as interlinked with import of raw materials from its AE alone.
5.8. It is simple and plain that cross subsidization of the international transactions in a combined approach is impermissible. It is clear from section 92(1) that if an international transaction is recorded showing a lower income than its ALP income, then it is the higher ALP income, which should be considered for the purpose of computation of the total income. Section 92(3) of the Act manifests that the provisions of this section shall not apply in a case where the computation of income having regard to ALP has the effect of reducing income chargeable to tax. The net effect of section 92(3) is that if transacted value income from an international transaction is more than its arm's length price income, then, the ALP income should be discarded and the actual income should be considered considered.. To sum up, it is the higher of actual income or the ALP income from an international transaction, which should to be taken into consideration for computing the total income. It does not mean that the actual more income from one international transaction vis-a-vis vis its ALP income should be combined with another unrelated transaction which gives actual income less than the ALP income and then both be processed together under this Chapter so as to set off the income (Transacted income minus ALP income) from tthe first transaction with the potential income arising from the second transaction (ALP income minus transacted value income). When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be usurped by the income from the other international transaction giving higher income on transacted value. That is the reason for which the llegislature egislature has provided for determining the ALP of each international transaction separately from the others. As the international transactions of payment of royalty and fees for technical services are separate transactions and not closely linked with the other transactions with which the assessee has merged them, we cannot permit such merger or aggregation for the purpose of the determining their ALP on entity level under TNMM. We, therefore, reject this contention raised on behalf of the assessee.
5.9. Under nder these circumstances, we are of the considered opinion that the TPO was justified in segregating the international transactions of payment of royalty and fees for technical services from other international transactions as these are not linked with importort of raw material etc. from its AE. The assessee's contention in this regard is, ergo, repelled."
9. Respectfully following the propositions of law laid down herein and applying the same to the facts of the case and in view of our findings that TNMM at entity level is not the MAM and as all the international transaction are not of the same category or nature, we have to necessarily uphold the order of the TPO as confirmed by the DRP that TNMM is not the MAM for determination of ALP of royalty transactio transactions.
ns. The transaction has rightly been debundled.
9.1. Our view is reinforced by the assessee's TP Study for the Assessment Year 2011 2011-12, wherein he has used Cost Plus Method for determination of royalty. This is clear from the order of the DRP for the Asses Assessment Year 2011-12.
7 ITA No. 575/Kol/2015Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12
10. In fact the assessee has not applied TNMM as MAM either for import of finished goods or import of raw material during this Assessment Year 2011 2011-12.
12. Thus, this argument of the assessee that TNMM is the MAM is hereby rejected.
11. This brings us to the question as to whether CUP is the MAM for benchmarking royalty for the purpose of determining the ALP.
12. In the case of Gruner India Pvt. Ltd. vs. DCIT (supra), this issue was considered, wherein it para 7.5., it was held that:
"....application pplication of the CUP as the most appropriate method in the given circumstances for determining the ALP of the international transaction of royalty and fees for technical services......".
12.1. On the issue, whether RBI approved rate for royalty in a particula particular case can be considered as conclusive that the transaction is at ALP, the Bench relied on the judgment of the Hon'ble Delhi High Court in the case of CIT v Nestle India Ltd. 337 ITR. ITR 103 (Del. HC), and held as follows:-
"In our considered opinion, at best, the rate of royalty approved by the RBI has a persuasive value in the process of determination of ALP of Royalty for a particular case and cannot be considered as conclusive"
13. Be it as it may, the Hon'ble Bombay High Court in the case of CIT vs. SSGS India Pvt. Ltd. (supra), has held as follows:
follows:-
"7. The Revenue before us contends that Press Note No.9 (2000 series) issued by Ministry of Commerce, Government of India in clause III thereof provides as under:
under:-
"III. Payment of royalty upto 2% for exports and 1% for domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer.
Thus, it is submitted that the bench marking of royalty payable by the respondent to its parent company has to be lower than 3% for the purpose of arriving at the ALP.
8. As against the above, the respondent respondent-assessee assessee pointed out that the Press Note No.9 (2000 Series) being relied upon by the Revenue, even if applied would indicate that in case of who wholly lly owned subsidiaries such as respondent, a Royalty 8 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 payment is allowed for user of brand name upto 8% on export and 5% on domestic sales. In support reliance is place on Clause (IV) of the Press Note which reads thus:
thus:-
"IV. Payment of royalty upto 8% on exports
xports and 5% on domestic sales
by wholly owned subsidiaries to offshore parent companies is allowed under the automatic route without any restriction on the duration of royalty payments.
11. In view of the above, the grievance of the Revenue that the Trib Tribunal ought ot have lowered the bench marking on application of Clause III of the Press Note 9 (2000 Series) dated 8 September 2000 does not survive. Accordingly, question as proposed does not give rise to any substantial question of law. Thus not entertain entertained."
14. A perusal of the judgement demonstrates that the revenue have agreed that the Press Note No. 9 (2000 Series) can be used for the purpose of benchmarking. Thus we are of the opinion that the approval from RBI constitutes a Benchmark for determinati determination on of ALP.
14.1. Various Benches of the Tribunal in the following cases, have held that payment of royalty which is approved by the Government of India, Ministry of Commerce and Industry, can be considered as a benchmark for determining whether the transac transactions tions in question are at Arms Length Price under CUP Method.
Johnson & Johnson Ltd, Mumbai vs ACIT 37 CCH 055 (Mum) Sona Okegawa Precision Forgings Ltd. v. Addl. CIT 143 TTJ 516 (Delhi)(Trib.) NLC Nalco India Ltd. vs. DCIT ITA No. 529/Kol/2008 & NLC Nalco India Ltd. vs. ACIT ITA No. 1256/Kol/2009 14.2. Thus, there is difference in opinion on this issue between different benches of the Tribunal. Under these circumstances, we prefer to follow the decision of the Hon'ble Bombay High Court in the case of CIT vs.. SGS India Pvt. Ltd. (supra), on this issue and hold that benchmarking of royalty payable can be made with Press Note No. 9 (2000 Series) issued by the Ministry of Commerce & Industry, Government of India, as well as the approval issued to the assessee forr payment of this royalty by DIPP Ministry of Industry, Government of India. We agree with the submissions of the ld. Counsel for the assessee on this issue. In the result, the adjustments made on account of royalty are hereby deleted.
8. Consistent with the he view taken therein, we direct the Assessing Officer to delete the adjustment made on account of payment of royalty.
9. Ground Nos. 9 to 14 are against the adjustment relating to payment of service charges under the head Head Quarter Service Agreement an andd IT Service agreement (hereinafter referred to as "Intra Group Services").
9.1. This Bench of the Tribunal in the assessee's own case while adjudicating this issue for the Assessment Years 2009-10 in ITA No. 393/Kol/2014,, held as follows:-
follows:
"8. Looking at the nature of the services, we are of the considered opinion that these are not in the nature of stewardship services. These are services which assists Sika India in managing the daily affairs of its business. It helps Sika India in conducting iits ts business operations of manufacturing and sale of chemicals. The DRP, in its order has agreed that the services in question have benefitted the assessee company. When this is the factual finding of the DRP, 9 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 then to come to the conclusion that the ALP was rightly determined at Nil by the Assessing Officer, for the reason that the proportion of the benefit could not be determined separately between the assessee and its AE, is to our mind, not correct. Suchch difficulties in allocation do does not make a service, a stewardship service. The assessee has not incurred any expenditure for these services locally. It had depended entirely on the AE for these services. It is not possible for an organisation such as the assessee to carry on business without these services which include I.T. Services. They are essential to the business of the assessee.
For the Assessment Year 20062006-07, 2007-08 and 2008-09, 09, the TPO has not characterised these services as stewardship services. He sought to determine the ALP of these services based on proportions of share of service fee charged to the Indian entity. In this year, this approach is sought to be changed. Like many other cases, the TPO came to a conclusion that the services in question are stewardship services, without any basis or logic. Such classification is arbitrary."
9.2. Consistent with the view taken therein for the Assessment Year 2009-10, 2009 on the same issue, we uphold the contentions of the assessee and delete the addition addition.
10. Ground Nos. 15 to 16, are on the issue of disa disallowance llowance of amortised lease payment. This Bench of the Tribunal in the assessee's own case for the Assessment Year 2006-07 to 2008-09, 09, on the very same issue, relied on the judgment of the Hon'ble Delhi High Court in the case of M/s. Krishak Bharat Bharati Cooperative ative Ltd. vs Deputy CIT reported in [2012] 23 taxmann.com 265 (Delhi) and upheld the disallowance. The assessee relied upon the judgment of the Hon'ble Gujarat High Court in the case of DCIT vs Sun Pharmaceuticals reported in 24 DTR 262 (Guj.) for the proposition that the amount is allowable as revenue expenditure as the assessee had acquired a facility to carry on business. It was further submitted that the Assessing Officer has accepted this position for Assessment Year 2013-14 14 onwards.
10.1. We find that the Mumbai Special Bench of the ITAT in the case of JCIT vs. Mukund Ltd. reported in (2007) 291 ITR 249 (Mumbai) (Mumbai), has held as follows:-
"21.
21. In the case before us the lease is for a period of 99 years, which is as good as a perpetual lease in favour of the assessee. There is no material on record to suggest that the amount of Rs. 2.04 crores paid to the Government concern MIDC was an advance payment of rent for the period of lease paid in lump sum by the assessee company. The terms of agreemenagreement dt. 5th March, 1992 entered into between assessee company and the Government body M/s MIDC clearly mention that a sum of Rs. 2.04 crores is the amount of deposit to be adjusted towards "premium" payable by the licensee for the allotment of 50 acres of la land nd in Kalva Industrial Area. The plea of the assessee that the lease agreement was not entered into till date and 10 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 hence, the status of the assessee is that of a licensee only, makes no difference, since on p. 2 of the agreement of the assessee company with MIDC dt. 5th March, 1992, it is specifically mentioned that the licensee shall be deemed to be bare licensee only of the premises at the same rent and subject to same terms as if the lease had been actually executed. A reading of the agreement dt. 5th Mar March, ch, 1992 entered into with MIDC clearly shows that the amount of Rs. 2.04 crores was paid by the assessee company to MIDC as "premium" or "Salami" for the acquisition of the premises on lease for a period of 99 years. In reply to a specific query from the Bench, the learned Counsel for the assessee submitted that the cost of boundary walls on this 50 acres of land was capitalized in the account books of the assessee and depreciation was claimed by the assessee. The action of the AO in allowing proportionate rent in the subsequent asst. yrs. 1995 1995-96 and 1996-97,97, shall not alter the character of the amount paid by the assessee to MIDC for acquisition of the premises. We are aware that mere use of the word premium in the agreement dt. 5th March, 1992 shall not make the character of the amount of Rs. 2.04 crores paid to MIDC as "premium", if the combine reading of the agreement leads to some other conclusion. In this case, not only the word "premium" has been used in all relevant terms of the agreement dt. 5th Ma March, rch, 1992 with Government concern MIDC, but also considering the terms of the agreement dt. 5th March, 1992 as a whole it is clear that the amount of Rs. 2.04 crores was paid as "premium" for acquisition of leasehold rights in the premises. The Clause 5(b) 5(b)(i)
(i) of the said agreement dt. 5th March, 1992 provides that in case of termination of lease, the "premium" is nonnon-refundable.
refundable. It provides that in case the licensee fails to complete the said factory building within the time aforesaid and in accordance with the stipulations provided therein, the MIDC without making any compensation or allowance to licensee for the same and without making any payment to the licensee for refund or repayment of the premium aforesaid or any part thereof, can resume the land in question.
uestion. Thus, in case of termination of lease, the "premium" is nonrefundable and therefore, the same cannot be considered as advance payment of rent. There is no clause in this agreement to show that the amount of Rs. 2.04 crores was paid by the assessee as advance rent for all future years and the lump sum payment of future years' rent has been paid to avail some concession for advance payment of rent or for some other business consideration. The land in question is inheritable also as per the terms and conditions of the agreement with MIDC. Therefore, considering the terms of agreement dt. 5th March, 1992 as a whole, we hold that the consideration of Rs. 2.04 crores was paid to MIDC as a price for obtaining the leasehold rights for a period of 99 years ffrom rom MIDC in favour of the assessee.
22. The decision of Hon'ble Kamataka High Court in the case of H.M.T. Ltd. (supra) relied upon by the assessee, is distinguishable since the Hon'ble Kamataka High Court has proceeded on the finding of fact recorded by tthe he Tribunal that the payment to MIDC was the future rent of the land. In the case of Devi Construction Co. v. Asstt.. CIT (supra), the Pune Tribunal has decided the issue in similar facts in favour of the R Revenue.
evenue. In this case before the Pune Tribunal, the amount was paid to MIDC for obtaining the leasehold rights of certain premises for a period of 95 years against the yearly rent of Re. 1 and a payment of lump sum amount as premium for the land. The Pune T Tribunal ribunal considered the various decisions of the Hon'ble Courts on the issue and held that there is no condition of existence of an economic rent in addition to the premium paid by the assessee. The Tribunal held that the decision of the Hon'ble Kamataka High gh Court in the case of H.M.T. Ltd. (supra) is distinguishable since the Hon'ble Kamataka High Court proceeded on the finding of fact recorded by the Tribunal that the payment to MIDC was the future rent of the land. The Pune Tribunal concluded that the amount ount paid as premium for the leasehold land taken from MIDC is capital in nature and not allowable. In the case of CIT v. Gemini Arts (P) Ltd Ltd.. (supra) relied on by the learned Counsel for the assessee, we find that decision of Hon'ble Madras High Court is distinguishable since the Hon'ble High Court has proceeded on the basis of fact that the payment of rent was made by the assessee in lump sum for the entire duration of lease period. The decision of Hon'b Hon'ble Supreme Court in the case of CIT v. Madias Auto Service (P) Ltd.. (supra) was discussed by the Hon'ble Bombay High Court in the case of CIT v. Khimline Pumps Ltd.. (supra), wherein it was held that the decision of the Hon'ble Supreme Court in Madras Auto Service (P) Ltd. (supra) is distinguishable on facts since in the case before the Hon'ble Supreme Court the old 11 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 construction was dilapidated and the asseassessee ssee could not have carried on business in the old structure and under the lease the old structure was permitted to be demolished and the demolition was at the cost of the assessee and the assessee put up a new construction at its own cost and under the le lease ase the lessee had no right, title and interest in the new construction, whereas in the case before the Hon'ble Bombay High Court in the case of Khimline Pumps Ltd. (supra), the assessee was entitled to take away the building on the expiry of the lease. In the case of Sudhaishan Chemicals Ltd. (supra), the Pune Tribunal in similar facts decided the issue in favour of the Revenue and held that considering the entire agreement as a whole, the expenses incurred by the assessee for obtaining the leasehold rightss were capital in nature and therefore not allowable as deduction. The facts of the case of Sudhaishan Chemicals Ltd. (supra) are similar to the facts of the case of the assessee before us. In the case of Sudhaishan Chemicals Ltd. (supra), the lump sum pay payment ment was made by the assessee company to MIDC for acquisition of leasehold rights for the land for 99 years. In the case of Pancham Acquaculture Farms Ltd. v. ITO ITA No. 3742/Mum/2004 (SMC) allowing amortization of leasehold premium paid for acquiring lea leasehold sehold rights for a period of 21 years. We find that the learned Single Member of the Tribunal has followed the decision of Hon'ble Madras High Court in the case of CIT v. Gemini Arts (P) Ltd.. (supra). We have already discussed the decision of Hon'ble Madras High Court in the case of Gemini Arts (P) Ltd. (supra) and is distinguishable since the Hon'ble Madras High Court has proceeded on the fact that the payment of rent was made in lump sum for the entire duration of the lease period. Another case relied on by the learned Counsel for the assessee is of Hon'ble Supreme Court in the case of Durga Das Khanna v. CIT (supra), which has been contested by the learned lea CIT (Departmental Representative) by submitting that this decision of the Hon'ble Supreme Court, in fact is in favour of the Revenue. In this case the assessee had taken on lease certain premises for a period of 99 years with a right to assign the lea lease se and alter the structure of the premises so as to convert it into a cinema hall. The assessee after spending Rs. 35,000 on some alterations, felt the necessity for having some more money in order to convert the premises to a cinema house and for this purpurpose pose entered into an agreement dt. 23rd Feb., 1946 by which the building was demised to the lessee for a period of 30 years. The lessee agreed to pay under the lease agreement Rs. 55,200 to the assessee towards the cost of erecting the cinema house and alsoo the rent of Rs. 2,100 per month. There were no provisions for the adjustment of the sum of Rs. 55,200 towards rent or for its repayment by the assessee. The Tribunal and the Hon'ble High Court held that the amount of Rs. 55,200 was paid in the nature of advance payment of rent. On appeal, the Hon'ble Supreme Court held that the Tribunal and the High Court were in error in holding that the sum of Rs. 55,200 was advance payment of rent. The Hon'ble Supreme Court held that a sum of Rs. 55,200 was in nature ooff premium or Salami and it had all the characteristics of a capital payment and was not revenue in nature. In these facts, we find that the decision of the Hon'ble Supreme Court in the case of Durga Das Khanna (supra) is in favour of the Revenue wherein ththee payment of Rs. 55,200 was held as premium or Salami and capital in nature. In the case of the assessee before us, there is no condition or stipulation in the agreement dt. 5th March, 1992 from which it could be inferred that the sum of Rs. 2.04 crores had d been paid by way of advance rent, nor was there any provision for its adjustment towards rent or for its repayment to the assessee. In the facts of the case before us, the ratio of the decision of Hon'ble Supreme Court in the case of Durga Das Khanna (su (supra) applies and the amount of Rs. 2.04 crores paid by the assessee is in the nature of premium and as such capital in nature.
23. In the case of CIT v. Project Automobiles (supra), the issue was whether the premium paid to obtain land on lease can be claimed as revenue expenditure. The assessee in this case had taken a plot of land for a period of 30 years on lease and a premium of Rs. 62,500 was payable in 12 equal monthly instalments. The Hon'ble Madhy Madhya a Pradesh High Court held that it is apparent that the assessee obtained a right of enduring nature in the plot in question and in order to obtain this right it had to pay a sum of Rs. 62,500 as premium and therefore, could not on the facts of the case be treated as advance rent. The payment of Rs. 62,500 was apparently in nature of Salami payment in order to obtain the right of an enduring nature in the plot in question and was. obviously in the nature of capital expenditure.
12 ITA No. 575/Kol/2015Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12
24. In the case of Panbari TeTeaa Co. Ltd. (supra), the facts were that the assessee company has leased out two estates in consideration of premium and certain amount of annual rent. The premium was claimed by the assessee company as capital receipt. The AO held the same as revenue receipt.
pt. The Hon'ble High Court held the receipt as capital receipt. On further appeal, the Hon'ble Supreme Court examined the law pertaining to the concept of premium and held the amount as "Salami". The Hon'ble Supreme Court referred to the observation of Jud Judicial Committee in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT (1943) 11 ITR 513, 519 (PC) thus "Salami is a single payment made for the acquisition of the right of the lessees to enjoy the benefitsits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account." The Hon'ble Supreme Court agreed with a finding of Board of Agricultural Income-taxtax in concluding that salami is of a Single non non-recurring recurring character and it is a payment prior to the creation of a tenancy. It is the consideration paid by the tenant for being let into possession and can be neither rent nor revenue but is a capital receipt in the hands of the landlord. The Hon'ble Supreme Court in Panbari Tea Co. Ltd.'s case (supra) held that "The real test of a salami or premium is whether the amount paid, in a lump sum or in instalments, is the consideration paid by the te tenant nant for being let into possession. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. Thee former is a capital receipt and the latter are revenue receipts. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so so-called called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties." The Hon'ble Supreme Court in this case has discussed the provision of Section 105 of the Transfer of Property Act and has observed that "Under Section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share off crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the pprice is called the premium, and the money, share, service or other thing to be so rendered is called the rent. The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid p periodically eriodically to the lessor". In the case of Aditya Minerals (P) Ltd. (supra), the facts were that the assessee obtained a lease for a period of 15 years at a monthly rent of Rs. 35 per acre. Clause Clause-II II of the lease deed stated that the lessee shall deposit with ith the lessor by way of guarantee for due performance of this lease deed for 15 years, the amount equal to rent of lease of land for the full period of lease and it will be adjustable against the rent of every month. This entire guarantee deposit shall no not carry any interest payable to the lessee by the lessor. The lease deed granted to the assessee a liberty to use the land for excavation purpose and subsidiary purpose. The assessee claimed the rent amount worked out for the relevant assessment year as re revenue venue expenditure. The Hon'ble Supreme Court in the facts of the case held the expenditure claimed by the assessee as not allowable deduction in computing the business profit of the assessee company.
25. The case of CIT v. Khimline Pumps LtdLtd.. (supra) has been heavily relied upon by the CIT (Departmental Representative). The facts of the case are that an open plot of land in Kalva Industrial Area, Thane was leased out by MIDC to a company known as APV Equi Equipments Ltd., for a period of 95 years on payment of yearly rent of Re. 1 and in consideration of payment of Rs. 1,62,400 as premium. The lease period was 95 years as per the terms and conditions of the agreement. The lessee would be entitled to remove buil buildings, dings, erections or structures put up by the lessee on the land and the vacant position of the land has to be handed over to the lessor after the end of 95 years lease period. The company APV Equipments Ltd. went in liquidation by the order of Hon'ble Bomb Bombay ay High dt. 25th July, 1985. M/s APV Equipments Ltd. is ordered to be wound up. Subsequently the Official Liquidator sought consent of MIDC for transfer of 13 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 premises (land) to the assessee who was the highest offerer. In the deed of assignment, it was mentioned oned that the value of the land and plant and machinery stood bifurcated for the purpose of payment of stamp duty in two parts i.e., 72 lakhs for the land and building and 3 lakhs for the plant and machinery. During the course of assessment proceedings, in the case of the assessee, i.e., Khimline Pumps Ltd., the AO found that assessee has purchased the whole unit for Rs. 75 lakhs and out of the said amount for Rs. 75 lakhs, Rs. 45 lakhs related to the acquisition of leasehold land and Rs. 27.81 lakhs relaterelated d to the building and the balance related to the machinery purchased by the assessee. The assessee contended before the AO that Rs. 45 lakhs were paid as advance rent since APV Equipments Ltd. was entitled to use and occupy the property for 95 years for pa payment yment of Re. 1 per annum. The assessee contended that on expiry of the lease period of 95 years, the plot with building had to be surrendered to MIDC since the assessee is merely substituting itself in the place of APV Equipments Ltd. The AO held that the payment of Rs. 45 lakhs to the Official Liquidator was for the purchase of leasehold rights and therefore capital in nature. Alternatively, the AO observed that at the highest, proportionate rent attributable to the assessee would be allowed. The AO finall finally disallowed Rs. 45 lakhs as capital expenditure in the hands of the assessee. The Tribunal was of the view that since benefits of these expenditure of Rs. 45 lakhs would be exhausted in 71 years, the proportionate amount relatable to each year amounting tto o Rs. 63,380 per annum may be allowed as deduction on account of payment of rent for that year for 71 years. The matter went to the Hon'ble Bombay High Court at the instance of Revenue which upheld the order of the AO and held as under:
(i) allowing the appeal ppeal of the Department, that, having come to the conclusion that Rs. 45 lakhs was a capital expenditure, the Tribunal could not have directed the Department to apportion the amount over a period of 71 years.
(ii) Rejecting the cross-objection objection of the asse assessee, ssee, that, on the facts, the Tribunal was right in coming to the conclusion that the sum of Rs. 45 lakhs constituted capital expenditure. The assessee was not the original lessee; the original lessee was APVE Ltd., which paid the premium amount of Rs. 1,6 1,62,400.
2,400. The assessee paid Rs. 75 lakhs including Rs. 45 lakhs, to acquire the whole unit. The payment was to secure an advantage for the enduring benefit of the trade:
CIT v. Madras Auto Service (P) Ltd Ltd. distinguished.
It is well settled that in order to ascertain the true character and purport of a payment, the Court has to go by the substance of the transaction and not by the manner in which the assessee allocates the item for accounting purposes.
26. Wee find that the facts of the case before us are similar to the facts of the case in the case of Khimline Pumps Ltd. (supra). We are not impressed by the argument of the learned Counsel for the assessee that the ratio of decision of Hon'ble Bombay High Cour Courtt in Khimline Pumps Ltd. case (supra) is distinguishable since in Khimline Pumps Ltd. case (supra) the assessee was not the original lessee. This distinction pointed out by the learned Counsel for the assessee is not sustainable for the reason that the decdecision ision of the Hon'ble High Court is not based on the fact that the assessee was not the original lessee of the premises. All other facts of the case of the assessee before us are similar to the facts of the case of Khimline Pumps Ltd. (supra). The ratio of the decision of Hon'ble jurisdictional High Court in the case of Khimline Pumps Ltd. (supra) is clearly applicable to the facts of the case of the assessee. In this case of the assessee all the essential ingredients of treating the amount of Rs. 2.04 crore croress paid by the assessee for acquisition of leasehold rights for 99 years in the land as capital in nature are present. The benefit conferred on the assessee of lease rights is for 99 years against the lump sum payment of Rs. 2.04 crores is of enduring natur nature.
e. There is no material on record to suggest that the sum of Rs. 2.04 crores had been paid by way of advance rent nor was there any provision for its adjustment towards rent or for its repayment to the assessee. We find that in case, the assessee terminatess the lease agreement and handovers the vacant position of the land to 14 ITA No. 575/Kol/2015 Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 MIDC (lessor) prior to the expiry of lease period of 99 years, it shall not be entitled to any refund out of the amount of Rs. 2.04 crores paid by the assessee. There is also no materia material on record to show that the assessee has made the advance payment of rent for future years to secure any reduction in the rent payable for the future years or for any other business consideration. Considering the totality of the facts and circumstances of the case and the terms of the agreement dt. 5th March, 1992 entered into between the assessee company and MIDC as a whole, we hold that the consideration of Rs. 2.04 crores paid by the assessee company for obtaining the leasehold rights from MIDC in favou favourr of the assessee for a period of 99 years is capital in nature and therefore, not allowable as deduction to the assessee. The decision of the Hon'ble Supreme Court in the cases of Panbari Tea Co. Ltd. (supra), Durga Das Khanna (supra), Aditya Minerals (P) Ltd. (supra) and Hon'ble jurisdictional High Court in the case of Khimline Pumps Ltd. (supra) would squarely apply to the facts of the case of the assessee, and being binding in nature, we decide the issue in ground of appeal No. 10 of the Revenue in favourur of the Revenue and the ground of appeal No. 10 of the Revenue is allowed and the issue referred to the Special Bench by the President, Tribunal is answered in the negative and in favour of the Revenue.
10.2. Respectfully following the decision of the SSpecial pecial Bench of the Tribunal and consistent with the view taken by the co co-ordinate ordinate bench for the Assessment Year 2006- 2006 07 to 2008-09, 09, we uphold the disallowance and dismiss this ground of the assessee.
11. Ground Nos. 17 to 18 are related to leave encashment. These are dismissed as not pressed.
12. Ground No. 19 is regarding set off of brought forward loss and u unabsorbed depreciation. This issue is set aside to the file of the Assessing Officer for fresh adjudication, in accordance with law as this is to be given and also requires verification of facts.
13. In the result, appeal of the assessee is allowed in part.
Now we take up ITA No. 911911/Kol/2016,, which is the appeal for the Assessment Year 2011-12
14. Ground No. 1 is general in nature.
15. Ground No. 2.1. to 2.4., pertain to TP adjustment on account of contract R&D Services.
15.1. After hearing rival contentions, we hold that the following two comparable companies have to be included for the purpose of computation of the ALP of the international transactions:-
15 ITA No. 575/Kol/2015Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12
1) Syngene International - This company does not fail the related party transactions (RPT) filter of 25% applied by the TPO. The TPO has by mistake, taken the figures in lacs while computing the percentage of RPT, whereas the figures given in the annual report was in millions. This mistake resulted in wrong computation of RPT as a proportion of sales.
Hence, we direct the ld. TPO to include this company as a comparable for the purpose of computation of ALP.
2) Suven Life Sciences - This company was to be included as a comparable as per the directions of the DRP. These directions of the DRP were not followed by the TPO. Hence, we direct the TPO to include this company as a comparable while computing the ALP of the international transactions.
tran
16. The ld. Counsel for the assessee submitted that if these two comparables are included, he would not be pre pressing ssing his arguments on the other issues, issues as the assessee would not having any grievance and as the TP adjustment would get deleted.
deleted In view of the above submissions, we do not adjudicate any other issue raised by the assessee.
17. We now adjudicate Ground No. 3.1. to 3.10., which pertain to determination of ALP and consequent TP Adjustment on the international transaction of import of raw material and payment of royalty.
18. Ground No. 3.1. is general in nature.
19. Ground No. 3.2. is dismissed as not pressed.
20. Ground No. 3.3. is on the issue of extraordinary expenditure incurred during the year. The assessee's case is that this was the 100th year (centenary celebrations) of the company and hence it had incurred high costs towards employees welfare and sales promotions. It is the assessee's case that this centenary celebrations is an extraordinary event and the expenses incurred to celeb celebrate this extraordinary event should not be considered while determining the ALP. It was also pleaded that the issue may be set aside to the file of the TPO for verification and fresh adjudication, with a direction that extraordinary items in the profit an andd loss account and balance sheet to be suitably adjusted for the purpose of arriving at a fair and reasonable ALP.
16 ITA No. 575/Kol/2015Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 20.1. The ld. D/R, though not leaving his ground, ultimately submitted that the issue may be restored to the file of the Assessing Officer for verification and fresh adjudication
21. In line with the above discussion, we set aside Ground No. 3.3. to the file of the Assessing Officer for fresh adjudication in accordance with law.
22. Ground No. 3.5. & 3.6. are on the issue of inclusion or excl exclusion of certain comparables. Both parties agreed that mistakes have occurred both in the TP study as well as by the TPO's 's order in selection of comparable companies for the purpose of computation of ALP.
22.1. In view of our decision in Ground No. 3.3., ass desired by both the parties we set aside both these issues to the file of the Assessing Officer Officer/TPO for fresh adjudication, in accordance with law. In the result these grounds are allowed for statistical purposes.
23. Ground No. 3.7. is on the issue of taking into consideration of multiple year data. This ground of appeal is dismissed as not pressed.
24. Ground No. 3.8. is on the issue of consideration of operational income, under the head miscellaneous income.
24.1. We find that the TPO in the TP report,, with regard to miscellaneous income, has held that it would form part of the operating income. While holding so, the TPO, inadvertently did not take into account this income, while computing the operating profit margin of the manufacturing segment, while giving effect to the DRPs order. This mistake has to be rectified.
24.2. Hence the issue is set aside to the file of the Assessing Officer for verification and fresh computation.. The Assessing Officer is directed to take into account this income while computing puting the operating profit margin of the manufacturing segment of the assessee company. We are informed that the TPO has, in the subsequent years treated this miscellaneous income as an operating income. In view of the above discussion, we allow Ground No.. 3.8. of the assessee for statistical purposes.
17 ITA No. 575/Kol/2015Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12
25. Ground No. 3.9. is on the issue as to whether the provision for doubtful debts and foreign exchange loss should be considered as non non-operating operating expense. After hearing rival contentions, we deem it fit to set aside this issue to the file of the Assessing Officer for verification and with a direction to implement all the DRP's directions on this issue. The issue whether the foreign exchange loss and provision for doubtful debts, is an operating expenditure orr a non non-operating operating expenditure, depends on facts. The Assessing Officer is directed to verify this facts and adjudicate the issue, denovo, in accordance with law. In the result, Ground No. 3.9. is allowed for statistical purposes.
26. Ground No. 3.10. is on the determination of ALP of royalty payment made by the assessee.
27. This issue is covered by the order of this Bench of the Tribunal in the assessee's own case for the earlier Assessment Year. The royalty payment made by Sika India is as per the rates es approved by the Reserve Bank of India i.e., 5% of the domestic sales and 8% from export sales. This Bench of the Tribunal in the assessee's own case for the Assessment Year 2006-07 07 to 2008 2008-09 09 has held that the payments are at arm's length for the reason that they are as per the rates approved by the Government of India. Thus, this TP Adjustment is hereby deleted and the ground of the assessee is allowed.
28. Ground No. 4.1. to 4.6. is on the issue of intra group services.
29. This adjustment is hereby di directed rected to be deleted by applying the view taken by us in the assessee's own case for the Assessment Year 2009 2009-10, 10, which was followed by us for the Assessment Year 2010 2010-11.
11. Consistent with the view taken therein, we delete the addition and allow this ground of the assessee.
30. Ground No. 5.1 to 5.3. are on the issue of addition of "the provision of leave encashment" under normal provisions. This ground of the assessee is dismissed as not pressed.
31. Ground No. 5.4. is against the provision for leave encash encashment under MAT provisions. The assessee relied on the following case case-law law in support of its contentions that the provision for leave encashment is an ascertained liability:
liability:-18 ITA No. 575/Kol/2015
Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 The Hon'ble Gujarat High Court in the case of DCIT vs. Inox Leisure Ltd. [2013] 30 taxmann.com 127 (Gujarat HC) HC), held as follows:-
"17. Having heard learned counsel for the parties and having perused documents on record, we notice that CIT(A) as well as the Tribunal both noted that such provision for payment of gratuity was made on the basis of actuarial valuation method to this aspect. T The he revenue has not been able to make any dispute. If we proceed on that basis, law to our mind, seems fairly well settled. Bombay High Court in case of Echjay Forgings (P.) Ltd (supra)) in the context of similar provisions made in Section 115JB of the Act eexamined xamined whether the provision of gratuity liability of a company is required to added back to its book profit. In this context, it was held that the assessee had made the provision for gratuity on the basis of actuarial calculations. It,, therefore, cannot be said that the provision for gratuity is not ascertained liability.
18. In case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 the Apex Court held that the amounts set apart by an assessee to meet its liability on account of leave encashm encashment ent of employees is not a contingent liability. It was observed that what should be certain is the incurring of the liability which should also be estimated with reasonable certainty though the actual quantification may not be possible then. Its requiremen requirements ts are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date.
19. Likewise in case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the Apex Court examined the que question stion whether it is legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct the same in profit and loss account while working out the net profit of a company and further whether such appropriation amounts to a reserve or provision. The Supreme Court held that an assessee can while working out its net profits, provide from its gross receipts his liability to pay a certain sum towards gratuity liabilities of the employees. If such liability is properly ascertaina ascertainable ble and it is possible to arrive at proper discounted present value.
20. In case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC), the Supreme Court in the context of an assessee making provision for estimated expenditure tow towards ards warranty observed that provision is a liability which can be measured only by using substantial degree of estimation. Such provision is recognized when an assessee had a present obligation as a result of past events, and it is possible that any outflo outfloww of resources will be required to settle the obligation and further a reliable estimate can be made of the amount of obligation.
21. Considering the above judicial pronouncements and the facts on hand, we have no hesitation in upholding the Tribunal's vie view w that though actual payment of gratuity may be made at a later point of time upon periodical release of the employees from service, it is provision having been made on actuarial basis it cannot be stated to be an ununascertained liability so as to add it back ck in terms of Clause (c) to Explanation 1 to Section 115JB.
In the result, all the tax appeals are dismissed."19 ITA No. 575/Kol/2015
Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12 The Kolkata 'SMC' Bench of the Tribunal in the case of Mercury Car Rentals Pvt. Ltd. vs. DCIT, in ITA No. 1442/Kol/2018, order dt. 10/04/2019, held as follows:-
follows:
"7.
7. The third ground of appeal is against the Ld. CIT(A)'s action of confirming the addition made by the AO on account of the provision set aside for long long-term term employees' benefits in the form of gratuity, leave encashment, ex ex-gratia & bonus us while assessing the book profit u/s 115JB of the Act. Briefly stated the facts of the case are that the appellant had provided for the long term employees benefits inter alia including provision for gratuity, bonus and leave encashment etc. in terms of the mandatory Accounting Standards -15 15 issued by the Institute of Chartered Accountants of India. From the Notes forming part of the Annual Financial Statements for the relevant FY 20112011-12, 12, it is observed that provision for employee benefits have been provided ided on a scientific and systematic basis. Actuarial valuation reports were obtained to determine the said liability; copies of which have been placed in the paper book as well. The AO without assigning any reason added back these provisions to the computation tion of book profit u/s 115JB. On appeal, the Ld. CIT(A) also confirmed the impugned additions. Aggrieved by the order of Ld. CIT(A), the appellant is now in appeal before us.
8. Having heard the rival submissions and after perusing the material on record record; it is noted that the provisions in respect of gratuity, leave encashment, ex ex-gratia gratia & bonus were created on actuarial basis and had been estimated with reasonable certainty. Accordingly such provisions cannot be said to be provisions of unascertained lia liabilities bilities so to add it back under clause (c) of the Explanation to section 115JB(2). Since these provisions are in the nature of ascertained liabilities, I am of the considered view that the same is allowable while computing book profit u/s 115JB of the I.T I.T.. Act. In this regard, I rely on the decision of this Tribunal in the case of Eastern Power Distribution Co. of AP Ltd Vs ACIT (139 TTJ 94) wherein on identical set of facts this Tribunal held as follows:
"8.2 It is not in dispute that, in the instant cascase, e, the impugned amount of Rs.
9.08 crores has been appropriated towards the terminal benefits of the employees of the assessee company viz., gratuity and pension payable, on the basis of actuarial valuation. In the following cases it has been held that suc such kind of provision falls under the cate category of "Ascertained liability":
(a) CIT v. Ilpea Paramount (P (P.) Ltd. [2010] 192 Taxman 65 (Delhi)
(b) CIT v. National tional Hydro Electric Power Corpn. Ltd Ltd.. [2010] 45 DTR (Punj..&Har.) 117 In both the cases it has been held that the provision made for gratuity is an ascertained liability and hence the same is deductible while computing book profit under section 115JA/115 115JA/115JB. JB. In the second mentioned case, it has been held that the provision made for leave encashment, post post-
retirement medical benefit are also ascertained liabilities, which are deductible under section 115JB from the book profits. In the instant case, though thehe amount provided for the terminal benefits has been transferred to a "Reserve Fund", in our view, the amount so provided relates to a provision only. Since the said provisions falls in the category of "Ascertained liability", the same is allowable while computing the book profit under section 115JB. In view of the above, we reverse the order of learned CIT(A) and direct the Assessing Officer to exclude the amount relating to provision made for terminal benefits while computing the profits under section 11 115JB 5JB of the Act."
9. Following the decision of the coordinate Bench of this Tribunal in the case of Eastern Power Distribution Co. of AP Ltd Vs ACIT (supra), the AO is directed to delete the additions made in respect of the provisions for gratuity, leave encashment, ex-gratia gratia & bonus in the computation of book profit u/s 115JB. This ground accordingly stands allowed.
20 ITA No. 575/Kol/2015Assessment Year: 2010-11 & ITA No. 911/Kol/2016 Assessment Year: 2011-12
32. Applying the proposition of law laid down in the above case case--law to the facts of the case on hand, we allow this ground of the assessee by holding that the provision made for leave encashment on the basis of actual valuation cone by a competent professional is to be taken as ascertained liability. Thus, this ground no. 5.4. of the assessee is hereby allowed.
33. In the result, appeal of the assessee is allowed in part.
34. In the result, both the appeals of the assessee are allowed in part.
Kolkata, the 30th day of October, 2019.
Sd/- Sd/-
[S.S. Viswanethra Ravi] [J.
J. Sudhakar Reddy]
Reddy
Judicial Member Accountant Member
Dated : 30.10.2019
{SC SPS}
Copy of the order forwarded to:
1. Sika India Pvt. Ltd
Commercial Complex-II
620, Diamond Harbour Road
Kolkata - 700 034
2. Deputy Commissioner of Income Tax, Circle
Circle-11(2), Kolkata
3. CIT(A)-
4. CIT- ,
5. CIT(DR), Kolkata Benches, Kolkata.
True copy
By order
Assistant Registrar
ITAT, Kolkata Benches