Income Tax Appellate Tribunal - Pune
Atlas Copco (India) Ltd., Pune vs Addll.Cit, Range-8,, Pune on 5 August, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "C", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER
आयकर अपील सं. / ITA No.736/PUN/2011
िनधा रण वष / Assessment Year : 2005-06
Atlas Copco (India) Limited, ACIT, Range-8,
Sveanagar, Dapodi, Vs. Pune
Pune - 411 012
PAN : AAACA4074D
(Appellant) (Respondent)
आयकर अपील सं. / ITA No.732/PUN/2011
िनधा रण वष / Assessment Year : 2005-06
DCIT, Circle-8, Atlas Copco (India) Limited,
Pune Vs. Sveanagar, Dapodi,
Pune - 411 012
PAN : AAACA4074D
(Appellant) (Respondent)
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
आदेश / ORDER
PER R.S.SYAL, VP :
These two cross appeals - one by the assessee and the other by the Revenue - arise out of the order passed by the Commissioner of Income-tax (Appeals)-V, Pune on 28-02-2011 in relation to the assessment year 2005-06.2
ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited
2. First three grounds taken by the Revenue in its appeal are against the deletion of Transfer Pricing addition of Rs.3,50,06,690/- made by the Assessing Officer (AO) in respect of Royalty payment made by the assessee to its Associated Enterprises (AEs).
3. Briefly stated, the facts of the case are that the assessee 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) for determining the arm's length price (ALP) of the international transactions. The TPO noticed that the assessee paid Royalty for use of technology amounting to Rs.3,50,06,690/- to its Associated Enterprises (AEs). The assessee employed Transactional Net 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. At this stage, it is pertinent to mention that qua the remaining three reported international transactions of Commission received; Import of finished goods for sale in the domestic market; and Provision of engineering drawing and design services, the assessee again applied 3 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited the TNMM as the most appropriate method, but processed all of 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 TNMM but by aggregating it with the first two transactions of Import of raw materials and Export of finished goods. The TPO opined that 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 benchmarked separately and consequently the aggregation approached adopted 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 Copco 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 details in respect of costs incurred by the concerned AEs for the development 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 appeal. 4
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4. We have heard both the sides and gone through the relevant 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 that 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 determine the ALP of an international transaction under one of the methods mandated under rule 10B of the Income-tax Rules, 1962. Nothing of the sort has been done in the instant case. The TPO got influenced 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 assessee's own case for the earlier assessment years in which deletion of transfer pricing addition on payment of royalty by the ld. first appellate authority has been upheld. Considering the entire conspectus of the case, including the fact that the payment of Royalty to the AEs was as per RBI norms, we are satisfied that the view taken by the ld. CIT(A) is unassailable. This ground, therefore, fails.
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5. Ground no. 4 of the assessee's 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 earlier part of this order. The TPO observed qua this transaction that number of items were sold by the assessee to AEs and non-AEs, which included Elastic pins, Regulating assembly, Rubber packing, Springs etc. It was seen from the details filed by the assessee in Annexure-1 that for the same product the price charged from AEs was less than that charged from non-AEs, giving a cumulative difference of Rs.2,24,11,726/-. The TPO, therefore, rejected 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 of manufactured goods to AEs at Rs.50.96 crore, the assessee submitted that it made sales to non-AEs only at Rs.5.25 crore. Not 6 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited convinced with the assessee's version, the TPO separated figure of exports in respect of the goods which were also sold to non-AEs at Rs.3.09 crore. The remaining amount of exports to AEs at Rs. 47.86 crore was accepted at ALP. For the disputed transaction 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 goods 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 deliberately exported similar goods to its AE at price lower than that charged from non-AEs, the TPO held that the lower amount charged at Rs.2.24 crore was liable to be considered as transfer pricing 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 relevant 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 assessee 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 7 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited 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 also 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 made 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 that, the assessee contended before the TPO that there was a vast difference 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 onwards of the paper book. The first item dealt with in Annexure-1 is Elastic Pin. Sale of this product made by the assessee to its AE in Belgium is at the average rate of Rs.11.52 per unit with quantity of 2855 units as against sale of 20 units made to a Sri Lankan non-AE, 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 8 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited quantity sold to AE and non-AEs. Price has been less charged 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-à- 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. There is substantial difference in rates charged as well as quantity supplied. Sale of higher quantity is coupled with lower rate. The next item 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 that 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.236.22. Here it is found that the price charged from AE is more than 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 overview 9 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited of Annexure-1, it is found that no doubt the assessee charged less price from its AEs vis-à-vis non-AEs, but such lower prices are invariably conjoined with much higher number of units sold. In certain cases, the assessee charged its AEs at prices higher than that charged from non-AEs for similar products. The ld. AR explained that though the products are similar but these were customized as per the requirements of the non-AEs, which position has not been controverted on behalf of the Revenue. That apart, it is seen that there is difference in locations of AEs and non-AEs. Whereas the biggest buyer AE, namely, Power Tools Distribution N.V. is situated in Belgium; the biggest buyer non-AEs, namely, Bogala Graphite Lanka Ltd. is situated in Sri Lanka.
8. Rule 10B(2) of the Income-tax Rules, 1962 (hereinafter 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 which 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 differences, 10 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited 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 such 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, some 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 that 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 circumstances, the price charged from AEs and non-AEs cannot be compared under the 11 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited CUP method. The Hon'ble 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 applied the CUP method for benchmarking the assessee's international transaction. The Tribunal did not approve the application of the CUP method on account of such difference. When the Revenue preferred an appeal against the Tribunal order, the Hon'ble High Court held that the CUP method is not appropriate method in case of geographical difference, volume difference, timing difference, risk difference and functional difference. Reverting to facts of the extant case, we find that since there are significant differences in the sales made by the assessee to its AEs and non-AEs, the effect of which has neither been given by the TPO nor it has been shown that how it can be given, we hold that the action of the authorities below in applying the CUP as the most appropriate method cannot be countenanced.
10. Having held that the CUP is not the most appropriate method in the given circumstances, there is a need to determine the ALP of the international transaction under another suitable method. The ld. AR vehemently argued that in such a scenario of the Tribunal not 12 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited approving the application of the CUP method by the authorities, the ALP determination by the assessee under the TNMM would revive not calling for any transfer pricing addition. This contention in our considered opinion is sans merit. We have noticed above that 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 of the operating profit from all the three transactions. The TPO did not accept such aggregation. He determined the ALP of the payment of Royalty transaction separately. The ld. CIT(A) also dealt with the determination of the ALP of Royalty payment separately and we have also approved the action of the ld. CIT(A) in this regard. The assessee is nowhere aggrieved by the segregation of Royalty 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 under the TNMM in respect of such three international transactions including export of manufactured finished goods and payment of Royalty, automatically gets disturbed and cannot be construed as giving a correct profit level indicator of the distinct international 13 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited transaction of export of manufactured goods simplicitor. Not only the effect of profit from the transaction of payment of Royalty needs to be removed from the aggregated profit level indicator of the assessee, even the comparables and their PLIs may also undergo change because of such exclusion. Thus, it is evident that the contention of the ld. AR in this regard cannot be accepted. Under the prevalent circumstances, the ALP of the international transaction 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 the 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. It 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 Export of manufactured finished goods with the value of Rs.47.86 crore, which has been accepted by the TPO at ALP, cannot be now 14 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited interfered with. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. 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 that 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 assessee's 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 15 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited crore, that is, Rs.69.79/Rs.75.28*Rs.40 crore. The assessee's total sales were Rs.422.99 crore. In this way, the TPO computed 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 Rs.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 crore were added to it for working out the amount of commission that the assessee ought to have earned at arm's length at Rs.23.22 crore. As the actual amount of commission was received only at Rs.13.38 crore, the TPO proposed transfer pricing adjustment of Rs.9.84 crore on this count. The ld. CIT(A) overturned this proposition by holding that the TPO was not justified in not considering the cost of raw material and depreciation from the ambit of total expenses in his calculation. Relying on a table drawn at page 27 of the impugned 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 through the relevant material on record. It is noticed that the international transaction under dispute is Receipt of commission. The assessee 16 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited sold goods on behalf of its AEs and earned indenting commission of Rs.13.40 crore. As against the assessee applying the TNMM, the TPO has albeit not referred to any specific method for determination 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 incurred by the enterprise in respect of property transferred or services 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) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ;
(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market ;
(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii) ;
(v) the sum so arrived at is taken to be an arm's length 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 direct and indirect costs of production incurred by the enterprise in respect of services provided to an associated enterprise. The TPO has worked 17 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited out the amount of such expenses incurred by the assessee on sale of the AEs' products at Rs.11.30 crore. The second step under this method talks of finding out the normal gross profit mark-up to direct and indirect costs in a comparable uncontrolled transaction. 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 uncontrolled transaction as against the fact that the assessee had not rendered any marketing services to any outside party for commission. Whereas the transaction under consideration is receipt of commission on sales, the TPO further went awry by considering the assessee's entity level profit, which comprise of both from the manufacturing & trading activity and also rendering of marketing services to its AEs. He artificially deduced profit from the alleged marketing 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 crore vis-à-vis marketing expenses of Rs.40 crore; computing percentage of marketing profit to sales at 8.75% by taking the figures of profit 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.136.03 crore to 18 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited find out arm's length marketing profit on sale of AEs' product at Rs.11.92 crore. Then he determined the arm's length price of the transaction at Rs.23.22 crore by adding such profit Rs. 11.92 crore to the costs incurred by the assessee in rendering services at Rs.11.30 crore. As the transaction is that of earning commission, ideally, the benchmarking should also have been done with reference to an uncontrolled transaction of earning commission only. Notwithstanding the fact that the TPO was required to take the comparable uncontrolled transaction as that of rendering of marketing services alone, he started with the entity level figures of the assessee which also include sale of self goods ostensibly involving altogether different functions, assets and risks vis-à-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 fact that the figure of profit taken up by him also included profit from sale of manufactured goods. The ld. DR was fair enough to accept that the amount of depreciation ought to have been included. Even if we presume the initial step of adoption of the entity level profit of the assessee, including that from sale of self goods as correct, with which we do not otherwise agree, then also the total costs contributing to the manufacturing profit should have been 19 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited considered, which obviously include raw material cost and depreciation, as has been held in the first appeal. On considering the position in this manner, the ld. CIT(A), on pages 27 and 28 of the impugned order, has found the ALP of commission income at Rs.13.79 crore as against the transacted value of commission income at Rs.13.38 core, which is within plus minus 5% range, not calling for any transfer pricing addition. We, therefore, accord 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 assessee's appeal is against the confirmation of disallowance u/s.35DD of the Act at Rs.2,10,000/-, being, 1/5th 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.
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17. Ground no. 2 of the assessee's appeal is against the confirmation of disallowance of Rs.33,08,044/-, being, 40% of expenses on premises considering the same as capital in nature.
18. Here again, both the sides agree that similar issue has been decided by the Tribunal against the assessee in its order for 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 preceding year, following the view taken for the A.Y. 2004-05, we uphold the capitalization of expenses in relation to the premises @ 40%. At the same time, it is directed that the assessee be allowed depreciation on such capitalized amount.
19. Ground no. 3 of the assessee's appeal is against the disallowance out of Miscellaneous expenses. The AO discussed 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 Software development expenses of Rs.23,99,234/-; expenses on premises 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 available in respect of the remaining expenses, he disallowed 20% of such 21 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited expenses which led to the further addition of Rs.1,94,57,964/-. The assessee furnished certain details before the ld. CIT(A), who upheld the disallowance at 20% of the remaining expenses, against which the assessee has come up in appeal before the Tribunal.
20. We have considered the rival submissions and perused the relevant material on record. The assessee has placed break-up of total Miscellaneous expenses at pages 69-70 of the paper book. Similar issue came up for consideration before the Tribunal for earlier years as well. After allowing full deduction towards software expenses and fees for handling share record and making full disallowance for warranty expenses, Gifts and Donation, the Tribunal has restricted the addition to 15% of the balance expenses. Following the same view, we set aside the impugned order on this score and direct the AO to compute the amount disallowable out of Miscellaneous expenses in accordance with the directions given for the immediately two preceding years on this score.
21. Ground no.5 of the Revenue's appeal is against deletion of addition of Rs.2,84,04,988/- made by the AO on account of commission.
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22. The facts apropos this issue are that the assessee claimed 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 first appeal, against which the Revenue has come up in appeal before the Tribunal.
23. Here again we find it is an admitted position that similar issue has been determined by the Tribunal in favour of the 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 ground 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 for deduction u/s.35DDA of the Act.
25. Similar issue came up for consideration before the Tribunal in assessee's own case for earlier years as well. The Tribunal 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 ensure 23 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited that the assessee does not get deduction on actual payment basis. 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 basis.
26. Ground no. 8 of the Revenue's appeal is against allowing 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 appeal by the Revenue.
28. Ground no. 9 of the Departmental appeal is against allowing deduction towards provision for warranty at Rs.80,89,982/-.
29. Brief facts of this ground are that the assessee claimed deduction towards provision for warranty at Rs.1,16,01,982/-. The AO observed that actual payment towards expenses on this count was only Rs.35,12,000/-. He, therefore, made disallowance for the 24 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited remaining amount of Rs.80,89,982/-, which came to be deleted 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 onwards of its order for the A.Y. 2003-04 and restored the matter to the 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 should be allowed for actual expenses. As the facts are similar, we direct the AO to follow the same course of directions to the extent applicable for the year under consideration.
31. The assessee has raised the following two additional grounds :
"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 Hon'ble 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."25
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32. The Hon'ble 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 taxing 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 Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the tribunal for the first time, so long as the relevant facts are on record in respect 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 authorities) which bears on the tax liability of the assessee and the Tribunal has jurisdiction to examine the same. Having gone through the subject matter of the additional grounds taken by the assessee, it is discernible that whereas the first additional ground raises a pure 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. 26
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33. In respect of additional ground No.1, the ld. AR contended 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 Hon'ble Rajasthan High Court in Chembal Fertilizers Ltd. and Another and Vs. JCIT and Another (2018) 102 CCH 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 seriously resisted on behalf of the Revenue.
34. We have heard the submissions. It is seen that relying on Circular F. No. 91/58/66-ITJ(19) dt. 18th May, 1967, the Hon'ble 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 followed 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 record by the ld. AR. No contrary precedent has been brought to our notice by the ld. DR. Following the precedent, we allow this additional ground of appeal.
35. The second additional ground is against the allowing of depreciation on the amount of capital expenditure incurred by the 27 ITA No.736 & 732/PUN/2011 Atlas Copco (India) Limited 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/PUN/2010 for the A.Y. 2004-05 in which the Tribunal noticed that the assessee purchased a property during the year and carried 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 particular 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 AO to allow depreciation on such amount as per law.
37. In the result, the appeal of the assessee is partly allowed and that of the Revenue is also partly allowed for statistical purposes.
Order pronounced in the Open Court on 05th August, 2019.
Sd/- Sd/-
(PARTHA SARATHI CHAUDHURY) (R.S.SYAL)
JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; दनांक Dated : 05th August, 2019
सतीश
28
ITA No.736 & 732/PUN/2011
Atlas Copco (India) Limited
आदेश क ितिलिप अ िे षत/Copy
षत of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. यथ / The Respondent;
3. The CIT(A)-V, Pune
4. The CIT-V, Pune
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे
"सी" / DR 'C', ITAT, Pune;
6.
गाड फाईल / Guard file.
आदेशानुसार/
ार BY ORDER,
// True Copy //
Senior Private Secretary
आयकर अपीलीय अिधकरण ,पुणे / 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 JM
before the second member
4. Draft discussed/approved JM
by Second Member.
5. Approved Draft comes to Sr.PS
the Sr.PS/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.
*