Income Tax Appellate Tribunal - Mumbai
Ksb Pumps Ltd, Mumbai vs Assessee on 5 August, 2013
आयकर अपील य अ धकरण,
धकरण मंुबई
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES 'K' MUMBAI
सव ी आय.पी. बंसल, या यक सद य /एवं
एवं
नरे कमार
ु ब लै या, लेखा सद य के सम ।
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND
SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER
आयकर अपील सं. / ITA No. 8482/MUM/2010
नधारण वष /Assessment Year 2004-05
आयकर अपील सं. / ITA No. 3806/MUM/2012
नधारण वष /Assessment Year 2007-08
Deputy Commissioner of बनाम M/s.KSB Pumps Ltd.,
बनाम/
Income Tax, Centre-1,/LTU 126, Maker Chamber,
Vs.
28th Floor, World Trade Centre, Nariman Point,
Cuff Parade, Mumbai -5 Mumbai 400 021.
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACK5918J
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं. / ITA No. 8496/MUM/2010
नधारण वष /Assessment Year 2004-05
आयकर अपील सं. / ITA No. 3294/MUM/2012
नधारण वष /Assessment Year 2007-08
M/s.KSB Pumps Ltd., बनाम The DCIT, Cir. 3(2),/LTU
बनाम/
126, Maker Chamber, Aaykar Bhavan, MK Road,
Vs.
Nariman Point, Mumbai - 20.
Mumbai 400 021.
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACK5918J
(अपीलाथ /Appellant) .. ( यथ / Respondent)
2 ITA No.8496/Mum/2010 & Others
M/s.KSB Pumps Ltd..
आयकर अपील सं. / ITA No. 8497/MUM/2010
नधारण वष /Assessment Year 2006-07
M/s.KSB Pumps Ltd., बनाम/
बनाम The DCIT, LTU
126, Maker Chamber, 28th Floor, World Trade
Vs.
Nariman Point, Centre,
Mumbai 400 021. Cuff Parade, Mumbai -5
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACK5918J
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Assessee by: Shri R.Murlidhar
Revenue by : S/Shri Ajit Kumar Jain
& Manoj Kanojia
सनवाई
ु क तार ख / Date of Hearing : 05/08/2013
घोषणा क तार ख /Date of Pronouncement : 08/08/2013
आदे श / O R D E R
PER I.P.BANSAL, J.M:
ITA No.8496/Mum/2010 & 8482/Mum/2010 are cross appeals and they
are directed against the order passed by Ld. CIT(A)-15, Mumbai dated 29/9/2010 for assessment year 2004-05. ITA No.8497/Mum/2010 is an appeal filed by the assessee against order dated 26/10/2010 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act,1961(the Act) for assessment year 2006-07. ITA No.3294/Mum/2012 and 3806/Mum/2006 are also cross appeals which are directed against order passed by Ld. CIT(A)- 15, Mumbai dated 23/3/2012 for assessment year 2007-08. Grounds of appeal in each of the appeals read as under:
"Grounds of Revenue's Appeal in ITA No. 8482/MUM/2010 for A.Y. 2004- 05:
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing club expenses.3 ITA No.8496/Mum/2010 & Others
M/s.KSB Pumps Ltd..
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the additions made on account of transfer pricing adjustment being commission payment to M/s.KSB Singapore.
3. The appellant prays that the order of the lid. CIT(A) on the above ground be set aside and that of the Assessing Officer restored.
4. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
Grounds of Assessee's Appeal in ITA No. 8496/MUM/2010 for A.Y. 2004- 05:
1. The learned Commissioner of Income Tax (Appeals) -15 [CIT(A)] erred in upholding the order of Assessing Officer adding Rs.53,90,656 u/s.41(1) in respect of differential of sales tax liability and its actual pre-payment.
Your appellant submits that the said differential between the payment of net present value against the future sales tax deferral loan amount is not liable to tax and the same is wrongly added.
Your appellant further submits that the said difference does not represents the expenditure which is allowed as deduction and therefore there is no remission or cessation of the expenditure claimed earlier.
Your appellant therefore submits that the above addition is wrongly made and the same ought to be deleted.
2. The learned CIT(A) erred in confirming the disallowance u/s.14A amounting to Rs 3,48,641 worked out at 5% of the exempt income. Your appellant submits that the above disallowance is wrongly made and the same ought to be deleted.
In the alternative, the appellant submits that the disallowance made is excessive and unreasonable and same ought to be reduced substantially.
3. The learned CIT(A) erred in confirming the order of Assessing Officer denying deduction u/s.8OHHC in respect of proceeds on sale of DEPB licences of Rs. 1,49,78,117.
The learned CIT(A) erred in rejecting the appellant's claim that face value of the DEPB licence is the cost of DEPB licence and accordingly equated the profit on sale of DEPB licence with the sale proceeds of the same.
Your appellant submits that profit on transfer of DEPB licence ought to be worked out with reference to the face value of the licence. Your appellant therefore submits that the deduction u/s.8OHHC ought to be granted on the face value of the DEPB licence and the profit worked out by taking face value of licence as cost only is not eligible for deduction u/s.8OHHC.4 ITA No.8496/Mum/2010 & Others
M/s.KSB Pumps Ltd..
4. The learned CIT(A) erred in confirming the action of the Assessing Officer in reducing the deduction u/s.8OlB in respect of Nasik Unit from the profit of the business while computing the deduction u/s.8OHHC.
Your appellant submits that deduction u/s.8OHHC ought to be granted on the profit of the business without deducting the deduction u/s.801B.
5. The learned CIT(A) erred in not granting deduction u/s.8OlB in respect of the following receipts:
i. Insurance claim - Rs.1,25,000 ii. Interest on delayed payments by customers - Rs 8,32,000 Your appellant submits that deduction u/s.80IB is allowable on the above receipts and the same ought to be allowed as claimed.
Grounds of Assessee's appeal in ITA No. 8497/MUM/2010 for A.Y. 2006- 07:
1.The learned Transfer Pricing Officer (TPO) and Dy.Commissioner of Income Tax, LTU, Mumbai (Assessing Officer) erred in making adjustment of Rs 53,90,656 out of commission paid to KSB Amri (Asia Pacific) Pte. Ltd. (KSB Singapore) in working out the arm's length price and thereby erred in making the addition in respect thereof.
Your appellant submits that the above addition is wrongly made and the same ( ought to be deleted.
2. The learned Assessing Officer erred in making disallowance uls.14A of Rs. 4,99,563.
Your appellant submits that the above disallowance is wrongly made and the same ought to be deleted.
In the alternative, the appellant submits that the disallowance made by the Assessing Officer is excessive and unreasonable and same ought to be reduced substantially.
3. The learned Assessing Officer erred in disallowing additional depreciation of Rs.13,10,411 u/s.32(1)(iia) of the Act on the ground that the plant and machinery acquired before 31.3.2005 and installed after 31.3.2005 is not entitled to depreciation by holding that the asset should be acquired and installed within the same year.
Your appellant submits that the additional depreciation on machinery acquired before 31.3.2005 and installed after 31.3.2005 are entitled to additional depreciation and the same ought to be granted.
4. The learned Assessing Officer erred in disallowing professional fees of Rs. 2,88,50,546 paid to KSB AG for implementation of SAP programme by treating the same as capital expenditure as against the same claimed by the appellant as revenue expenditure.5 ITA No.8496/Mum/2010 & Others
M/s.KSB Pumps Ltd..
Your appellant submits that the above expenditure is revenue in nature and the same ought to be allowed as claimed.
Without prejudice to the above, the appellant submits that the depreciation thereon is allowable and the same ought to be allowed.
5. The learned Assessing Officer erred in making addition of Rs.1,14,196 on account of so called entries in the Annual Information Return received by the Assessing Officer.
Your appellant submits that the above addition is wrongly made and the same ought to be deleted.
"Grounds of Revenue's Appeal in ITA No. 3806/MUM/2012 for A.Y. 2007- 08:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the disallowance made by the A.O. of professional fees paid by the assessee to KSB AG.
2. The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the Assessing Officer restored.
3. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
"Grounds of Assessee's Appeal in ITA No. 3294/MUM/2012 for A.Y. 2007- 8:
"1.The learned Commissioner of Income Tax (Appeals)-15 [CIT(A)] erred in upholding the order of Transfer Pricing Officer and Assessing Officer in making adjustment of '84,29,667 out of commission paid to KSB Amri (Asia Pacific) Pte. Ltd. (KSB Singapore) in working out the arm's length price and thereby erred in making the addition in respect thereof.
Your appellant submits that the above addition is wrongly made and the same ought to be deleted.
2. The learned CIT(A) erred in confirmation the addition of '3,04,761 on account of entries in the Annual Information Return provided by the Assessing Officer in course of assessment proceedings.
Your appellant submits that the above addition is wrongly made and the same ought to be deleted."
2. These appeals were argued together as some of the issues are common and for the sake of convenience all these appeals are disposed of by this consolidated order.
6 ITA No.8496/Mum/2010 & OthersM/s.KSB Pumps Ltd..
3. Common issue involved in all these appeals is regarding adjustment made with regard to transfer pricing in respect of commission paid by the assessee to its Associated Enterprises (AEs). For arguing this issue both the parties have referred to the facts relating to A.Y 2004-05. It was the common contention of both the parties that facts and circumstances leading to such adjustment are similar for other years also. Therefore, facts relating to transfer pricing issue are mentioned from A.Y 2004-05 and decision taken on the basis of facts available for A.Y 2004-05 will be applicable to the transfer pricing issue in other appeals considered by this order.
4. For the sake of convenience we will first take transfer pricing issue and it will cover Ground No.2 of departmental appeal for A.Y 2004-05. Ground No.1 of assessee's appeal for assessment years 2006-07 and 2007-08.
5. The assessee has filed a consolidated paper book for all these appeals in which transfer pricing study report has been furnished only in respect of assessment year 2004-05. According to transfer pricing report, copy of which has been placed on pages 77 to 100 the assessee has several international transaction with its AEs which have been listed by the assessee in Transfer Pricing (TP) report at page 100 of the paper book. These transactions in the order of TPO are 14 in number. The TPO vide his order dated 5/12/2006 has accepted the price shown by the assessee except with regard to commission paid by the assessee to its AE in Singapore, namely M/s. KSB Singapore (Asia Pacific) PTE Ltd. It was claimed by the assesse in TP Report that transaction of the assessee with its AEs are unique to each AE and are not similar to transactions with unrelated parties whether as to export or import services. In absence of comparable unrelated transactions within KSB India's overall transactions, the impugned transactions with AEs are required to be bench marked with the transactions of the competitors in the business. In the TP 7 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
study the assessee has mentioned name of various parties who are dealing in the pumps or valves and ultimately in para 9.7 after mentioning various comparables it has been mentioned that there is absence of (i) same or similar comparable of uncontrolled transactions within KSB India; (ii) same or similar comparable uncontrolled transactions and transactions outside KSB India;
(iii) same or similar comparable concerns having same or similar transactions. In para 9.8 the profit results of three concerns have been mentioned and after compiling the same it has been mentioned that the ratio returns on assets employed on KSB India is better than the result of each of the above companies as well as average of Pump Industries and Engineering Industries and keeping in view these facts it has been mentioned in the report that profit margin shown by the assessee is justified by following transactions of net margin method. It may be mentioned here that assessee has not bench marked each of the transaction independently in the TP study.
5.1 The issue regarding determination of Arms Length Price (ALP) was referred to TPO, who with regard to commission paid has observed that such commission has been paid by the assessee for availing services of sole selling agent @ 12.50% of the sales obtained. It was also observed that the AE of the assessee to whom such commission has been paid was receiving commission @10% from the other group concerns. The TPO required the assessee to explain the same and was also required to explain as to why extra payment of 2.50% should not be disallowed. Vide letter dated 18/10/2006 it was submitted that more commission has been paid by the assessee to its AE on account of special factors attached to the products marketed by the AE. The AE of the assessee has also clarified vide its letter that products of assessee are more complex than the products of other group concerns marketed by them. For this purpose AE of the assessee had to carry out detailed discussions with the customers of the assessee and number of countries involved are also large for which the AE has to make additional sale efforts. It was further submitted 8 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
that AE is the sole selling agent of the assessee since 1979 and appointment of sole-selling agent is approved by the Central Government. The commission is being paid @12.50% since 1987 and the same has always been accepted. Due to efforts of AE there is a phenomenal increase in the turnover which has risen from Rs. 5.59 lacs in 1986 to 31.78 crores in 2004. In the alternative it was submitted that due weightage should be given to the extra efforts which are put in by KSB Singapore and the same should be bench marked with reference to the payments received by them from other group concerns as increased by additional efforts. Additional submissions were also made which have been reproduced in the order of TPO. The TPO after considering all these submissions has come to a conclusion that assessee has not been able to establish as to how the products of the assessee were more complex than the other goods sold by the AE of the assessee on which it has has received commission @10%. The TPO observed that there is no doubt that sales of the assessee relating to KBS Singapore have gone up but the same is the fact with the other sales made by the assessee which have similarly gone up. The AE of the assessee has also vested interest in increasing the sale to increase its income. Therefore, there is no extra ordinary reason which insist for the payment of additional 2.50% of the commission. The TPO also noticed that the assessee for rendering similar services to its AE is receiving commission @6%. The Singapore AE of the assessee is getting commission at the high rate. Therefore, the TPO has restricted the commission paid by the assessee to its Singapore AE @10% and an addition of Rs.63,60,732/- is made.
6. An appeal was filed before Ld. CIT(A). The submissions made before TPO were reiterated. In addition, it was submitted that for making addition of 2.5% commission TPO has not brought on record any comparable transaction with unrelated party either by the assessee or by its AE with unrelated party or any transaction outside the KSB group. It was submitted that in absence of comparable uncontrolled transaction, CUP method neither was available nor 9 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
could be applied. It was submitted that only method which could be applied was TNMM at entity level and under TNMM even after considering the entire commission, the profit level indicator was more than the comparables utilized by the TPO.
7. After considering the aforementioned submissions Ld. CIT(A) has observed that TPO has sought to invoke "internal comparable uncontrolled price" but the same is inherently flouted. According to Ld. CIT(A) the rate of 10% charged by the AE at Singapore is also a controlled transaction and so by its very nature not automatically eligible for comparability as it is not independent. As a matter of rule controlled transaction should by no means be used as basis for TP adjustment as the same would be contrary to Arms Length principle which required that tax payers commercial or financial relations with its related parties to be compared with commercial or financial relationship with independent parties. According to OECD guidelines the evidence from enterprises engaged in the controlled transactions with AE may be useful in understanding the transactions under review or as pointer to further investigation. According to Ld. CIT(A) in the facts of the case TPO did question the assessee about the higher rate of commission paid by it to its AE as compared with the commission paid by other related AEs. Ld. CIT(A) after referring to the letters submitted by the assessee has come to a conclusion that according to those letters the AE of the assessee was required to put extra efforts. It is further mentioned by Ld. CIT(A) that the assessee has bench marked its commission payment under TNMM by selecting safe comparables and from that it is observed that ratio of return of the assets employed by the assessee is @14.09%, which is better than result of each of the comparable companies and even after making payment on know-how fees and sale commission and treating it as item expense, the result of the assessee are better than all the companies, the average of which hovers around 10% as against assessee's average of 14.08%. The TPO did not doubt in respect of 10 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
ALP of 14 international transactions but has only picked up commission payment on the ground that CUP is available. Ld. CIT(A) further observed that no valid CUP exists as controlled transaction has been used as reference point and it is not established that the extent of services provided to other group concern by the AE at Singapore is the same as that provided to the assessee. The CIT(A) has further observed that there is constant increase in export to Singapore which re-enforce assessee's case. In this manner Ld. CIT(A) has deleted the TP adjustment of Rs.63,60,732/-.
8. For assessment year 2006-07 on similar facts adjustment was made by TPO, who applied CUP method and the action of TPO has been confirmed by Ld. DRP. Accordingly, the adjustment of Rs.1,08,95,284/- has been made and upheld.
9. For assessment year 2007-08 adjustment of Rs.84,29,667/- has been made on similar account as assessee did not object the draft order, the AO has passed order under section 143(3) r.w.s. 144C of the Act. The appeal was filed before Ld. CIT(A), who has upheld the adjustment.
10. Arguing the appeals for A.Y 2004-05, Ld. DR submitted that in the TP study the assessee has applied TNMM method which was not found to be applicable by TPO and on account of unavailability of comparable, the TPO applied internal comparison. From other AEs the Singapore AE was getting 10% commission that assessee could not justify the commission @12.5%. Ld. DR submitted that Ld. CIT(A) was wrong in deleting the addition by taking the over all profit of the assessee. Ld. DR submitted that for each international transaction the assessee has to satisfy that the same is at Arms Length Price (ALP). In the case of commission CUP method was applicable and assessee has remained unable to show that commission paid by it was at ALP. Thus it was pleaded by Ld. DR that addition has wrongly been deleted by Ld. CIT(A) 11 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
and the same should be restored. For other years Ld. DR relied upon the orders of DRP/CIT(A).
11. It was vehemently submitted by Ld. AR that even after grant of commission the profit of the assesee was on higher side with the comparables and, therefore, Ld. CIT(A) has rightly decided that no TP adjustment was called for.
11.1 In respect of other years it was submitted by Ld. AR that Ld. CIT(A) and Ld. DRP failed to appreciate that no addition was called for in respect of TP valuation of commission payment made by the assessee. He submitted that TNMM is appropriate method adopted by the assessee and according to TNMM method all transactions of the assessee are on ALP. Therefore, Ld. AR submitted that order of Ld. CIT(A) in respect of A.Y 2004-05 should be upheld and for other years the addition made in this regard should be deleted.
12. We have heard both parties and their contentions have carefully been considered. We have carefully gone through TP report field by the assessee which has been made the basis for claiming that all the 14 international transactions of the assessee are at ALP. These transactions have been listed in the order of TPO and for the sake of convenience are reproduced below:
S.No. Nature of transaction Amount (Rs.)
1. Purchases
a) Purchase of finished goods for trading-
b) Purchase of components 2,81,48,911/-
2. Export Sales to AE 20,10,53,203/-
3. Income from services received 1,19,52,815/-
4. Commission income (Received) 1,91,38,200/-
5. Order cancellation charges (received) 1,02,125/-
6. Total charges received 84,600/-
12 ITA No.8496/Mum/2010 & Others
M/s.KSB Pumps Ltd..
7. Reimbursement of expenses (actual) 26,66,790/-
8. Commission paid 3,18,03,660/-
9. Royalty paid 2,00,74,971/-
10. Technical know-how acquired 7,59,248/-
11. Payments for technical and other services 12,18,578/-
12. Testing charges paid 11,26,574/-
13. Expenses repaid 4,614/-
14. Warranty charges paid 55,10,500/-
Total 32,36,44,644/-
Each of the above mentioned international transactions has not been separately considered in the TP report and basis has been adopted as TNMM. As per section 92 of the Act any income arising from an international transaction shall be computed having regard to "ALP". As per section 92C the ALP in relation to an international transaction shall be determined by any of the following methods, being most appropriate method, having regard to the nature of transactions or class of transaction, or class of associate business or functions performed by such persons or such other relevant factors described by the Board;
(a) Comparable Uncontrolled Price method(CUP); (b) Resale Price method; (d) Cost plus method; (d) Profit Split method; (e) Transaction Net Margin Method(TNMM); such other method as may be described by the Board."
As it can be seen from the above list of international transactions that none of the international transactions match to each other. Therefore, it cannot be said that a common method will be sufficient to compute the ALP as firstly it has to be determined that which method will be appropriate method to compute the ALP of an international transaction. There is no dispute with regard to other international transactions which have been accepted by the TPO. The dispute is only in respect of commission payment. It is the case of 13 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
the assessee that TNMM should be applied and it is the case of the revenue that CUP method is appropriate method. Rule 10B(1) describes that for the purpose of sub-section(2) of section 92C, the ALP in relation to an international transaction shall be determined by any of the methods which have already been described in the above part of this order being most appropriate method in the following manner. Sub-clause (a) described CUP method which read as under:
(a) comparable uncontrolled price method, by which,-
(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;
(ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;
(iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;
Clause (e) describe TNMM method which is as under:
(e) transactional net margin method, by which,-
(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;14 ITA No.8496/Mum/2010 & Others
M/s.KSB Pumps Ltd..
(iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction; "
12.1. If we see the mode of computation provided under both these methods for computing ALP in respect of commission the most appropriate method will be comparable uncontrolled price method as the commission is paid by the assessee in respect of services provided by its AE. TNMM method is most appropriate method in the cases where sale and purchase is involved. Therefore, in our opinion the most appropriate method to compute ALP in respect of commission paid by the assessee is CUP method. However, the way in which TPO has applied CUP method is not appropriate. The AO has relied upon the internal transactions for arriving at a conclusion that the commission paid by the assessee is on higher side. Such opinion has been formed by TPO without giving any finding that whether or not any outside comparison is available in similar type of transactions. Such course can be adopted only in the circumstances where it is found that outside comparison is not available. In this view of the situation, we are of the opinion that the matter should be restored back to the file of AO with a direction to provide the assessee a reasonable opportunity to support its case in respect of ALP of commission payment. The assessee may file fresh TP study for this transaction and if the assessee does not desire to do so then the AO at his discretion given in the provisions of law may refer the same to TPO and this issue has to be re- adjudicated in this manner afresh. We direct accordingly. In the result, the aforementioned grounds are allowed for statistical purposes.
13. Apropos Ground No.1 of assessee's appeal for A.Y 2004-05 this issue is stated to be covered in favour of assessee by the decision of the Tribunal in assessee's own case for A.Y 2003-04 vide order dated 7/9/2011 in ITA 15 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
No.739/Mum/2007, wherein following Special Bench decision in the case Sulzer India vs. JCIT, 138 ITD 137 (Mum)(SB) it was held that if the Net Present Value (NPV) of future liability is paid there is no remission for the purpose of section 41(1) of the Act. Copy of the order was placed on our record and was also given to Ld. DR. The relevant portion of the Tribunal's order is as under:
"2. In Ground No.1, the assessee has raised the following grievance:
"On the facts and circumstances of the case, the Id CIT(A) erred in sustaining the addition made u/s.41(1) of Rs.3,06,20,848 being the difference in the sales tax loan liability and the actual payment, representing the net present value of existing liability in respect of the same made during F.Y. 2002-03 under the sales tax 1993 package scheme of incentive."
4. Learned representatives fairly agree that the issue is now covered in favour of the assessee by Special Bench of this decision of this Tribunal in the case of Sulzer India Ltd Vs JCIT (42 SOT 457), even as Learned Departmental Representative dutifully relied upon the orders of the authorities below,.
5. In view of the fact that the issue in appeal is admittedly covered by Special Bench decision in the case of Suizer India Ltd (supra), we cannot take any other view of the matter than the view so taken by the Special Bench. Therefore, respectfully following the decision of Special Bench in the case of Suizer India Ltd(supra) , we uphold the grievance of the assessee and the assessee succeeds on this issue.
6. Ground No.6 is thus allowed."
14. In this view of the situation, after hearing both the parties, respectfully following the aforementioned order of the Tribunal in assessee's own case we allow this ground.
15. Ground No.2 of assessee's appeal for A.Y 2004-05 was not pressed, accordingly the same is dismissed as not pressed.
16. Ground No.3 for A.Y 2004-05 relates to allowability or otherwise of deduction under section 80 HHC of the Act on DEPB benefits. It was stated to 16 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
be covered in favour of assessee by the decision of Hon'ble Supreme Court in the case of Topman Export vs. CIT 342 ITR 49 (SC).
17. We have heard both the parties on this issue. We find that when this issue was decided by Ld. CIT(A) and AO, the benefit of aforementioned decision of Hon'ble Supreme Court was not available. Therefore, we restore this issue to the file of AO with a direction to re-calculate the deduction under section 80HHC in accordance with the aforementioned decision of Hon'ble Supreme Court in the case of Topman Export vs. CIT(supra). We direct accordingly. For statistical purposes this ground is treated as allowed.
18. Ground No.4 of the assessee's appeal for A.Y 2004-05 was stated to be covered in favour of the assessee by the decision of Hon'ble Bombay High Court in the case of Associated Capsule Pvt. Ltd. vs DCIT, 332 ITR 42 (Bom). It was submitted that following the aforementioned decision of Hon'ble Bombay High Court similar issue was decided by the Tribunal in favour of the assessee by the aforementioned decision in ITA No.739/Mum/2007 dated 7/9/2011 in respect of assessment year 2003-04. Reference was invited to the following observations:
"13. In Ground No.(iii), the assessee is aggrieved in CIT(A)'s action in reducing deduction u/s. 80-IB while computing deduction under section 80 HHC.
14. The assessee had claimed deduction u/s. 80IB at Rs.1,86,10,408/-. In the assessment order u/s. 143(3) of the Act, the Assessing Officer reduced the deduction allowed u/s. 80IB from the profits of business in view of the provisions contained in section 801B(13) r.w.s. 801A(9) and allowed deduction at Rs.l,75,11,808. Vide order u/s. 154, the assessee has been allowed deduction of Rs.l,80,74,609 claimed earlier, the CIT (A) observed that the since the export turnover constitutes 5.53% of the total turn over of Nasik Unit, 5.53% of the deduction allowed u/s 801B may be taken to be the deduction allowed in respect of profit from export which are eligible for deduction u/s. 80 HHC. Therefore, he was of the opinion that the deduction u/s. 801B relatable to exports i.e 5.53% of Rs.1,80,74,609 at Rs.9,92,600 be excluded instead of whole deduction of Rs. 1,75,11,808 allowed u/s. 801B and directed the AO to rework out the deduction u/s. 80 HHC accordingly. Aggrieved, the assessee is in appeal before us.17 ITA No.8496/Mum/2010 & Others
M/s.KSB Pumps Ltd..
15. At the time of hearing, learned counsel for the assessee contends that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case in ITA No.5541/M/05 for the assessment year 2001-02 and also for the assessment year 2003-04. It was also submitted that later on the issue was decided against the assessee by the Tribunal in the case of ACET vs. Hindustan Mint., 315 ITR (AT) 401(SB). He also contends that now the Hon'ble Jurisdictional High Court in the case of Associated Capsules Pvt Ltd. v DCIT in Income Tax Appeal No.3036 of 2010 order dated 10th January, 2011 has reversed the decision of the ITAT in the case of Hindustan Mint (supra). In view of this, he contends that the issue is now squarely covered in favour of the assessee by the decision of the Tribunal in assessee's own case in ITA No.5541/M/0S for the assessment year 200 1-02 and also for the assessment year 2003-04.
16. Having heard the rival contentions and having perused the material on record, we find that Hon'ble Jurisdictional High Court in the case of Associated Capsules P.Ltd (supra) has disapproved the stand taken by Special Bench in the case of ACIT vs. Hindustan Mint(supra), wherein, the Tribunal has taken the view against the assessee, In view of this, respectfully following the judgement of the Hon' ble Jurisdictional High Court in the case of Associated Capsules Pvt Ltd. (supra), we hold that the assessee is entitled to claim whole deduction u/s. 80 HHC of the Act.
17. Ground No.3 (iii) is thus allowed."
Accordingly, after hearing both the parties we decide this issue in favour of the assessee.
19. Ground No.5 is regarding allowability of deduction under section 80IB in respect of insurance claim of Rs.1,25,000/- was not pressed by Ld. AR on account of smallness of the amount. So far as it relates to eligibility of interest on delayed payments by customers amounting to Rs.8,32,000/- for the purpose of deduction under section 80 IB it was submitted that this issue is covered in favour of the assessee by the following decisions:
(1) G.S.C Toughened Glasses vs. ACIT, 13 SOT 668 (Del) (2) Nirma Industries Ld., 283 ITR 402 (Guj) (3) Assessee's own case in respect of assessment year 2000-01 dated 7/10/2008 in ITA No.5540/Mum/05.18 ITA No.8496/Mum/2010 & Others
M/s.KSB Pumps Ltd..
20. After hearing both the parties, as the issue is covered in favour of assessee by the aforementioned decision, we decide this issue in favour of assessee. Accordingly, Ground No.5 is partly allowed.
Revenues' Appeal for A.Y 2004-05:
21. Ground No.1: This issue is covered in favour of the assessee by the decision of Hon'ble Bombay High Court in the case of OTIS Elevator , 195 ITR 682, wherein it has been held that club fees paid to employees are perquisites in the hand of the employees, therefore, cannot be disallowed in the hands of the employer. Ld. AR has also relied on the unreported decision of Hon'ble Supreme Court in the case of CIT vs. United Glass Manufacturing Co. Ltd., dated 12//9/2012 in Civil Appeal No.6447 of 2012, wherein their Lordships have held that club membership fee for employees incurred by the assessee is business expenditure liable for deduction under section 37(1) of the Act. Accordingly, after hearing both the parties we decide this ground in favour of the assessee and this ground of the revenue is dismissed.
Assessee's appeal for A.Y 2006-07.:
22. Ground No.2 relates to disallowance made under section 14A of the Act. Initially disallowance was calculated by AO with reference to Rule-8D at a sum of Rs.6,20,743/-. It was submitted before Ld. DRP that Rule 8D is not retrospective as per decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Company Ltd vs. DCIT, 328 ITR 81(Bom). Thus it was submitted that the disallowance is on higher side. Ld. DRP has held that rational method to make disallowance will be (i) any direct expense relating to earning of exempt income; (ii) pro-rata disallowance of interest in the ratio of exempted investment and total investment. Therefore, Ld. DRP has held that it will be appropriate to disallow 0.5% of the value of the exempt asset as representing the indirect expenses. In pursuance to such directions of Ld.DRP 19 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
the AO has worked out disallowance at Rs.4,99,563/-. The assessee is aggrieved, hence, has filed aforementioned ground.
23. The assessee in the present year has earned dividend income of Rs.22,43,601/-, which is claimed as exempt under section 10(34) of the Act. It is the case of the assessee that during the year no sale and purchase has been done, therefore, no expenditure has been incurred by the assessee and thus, no disallowance is called for. In the alternative it is the request of the assessee that for A.Y 2000-01 and 2002-03 the adhoc disallowance was restricted by the Tribunal to a sum of Rs.25,000/-. We have seen that similar submission was made by the assessee before Ld. CIT(A) in respect of A.Y 2004-
05. It has been found by AO that as in assessment year 2000-01 and 2002-03 the AO had adopted the method of 10% of income for disallowing the expenses and on such approach of the AO the Tribunal had restricted the disallowance of Rs.25,000/- on adhoc basis. Keeping in view the fact that two new investments were made by the assessee during the year and two were the old investments Ld. CIT(A) has restricted the same to 5% of the exempt income which was computed at 3,48,641/-. This ground for assessment year 2004- 05 has not been pressed. Therefore, adopting same approach we restrict the disallowance to 5% of the exempted income which will be a sum of Rs. 1,12,180/-. The balance addition is deleted. This ground is partly allowed.
24. Apropos Ground No.3, an additional depreciation of Rs.13,10,411/- unbder section 32(1)(iia) was claimed. Referring to the provisions of section 32(1)(iia) AO observed that for the purpose of allowability of additional depreciation the asset in respect of which such depreciation has been claimed should be acquired and installed after 31/3/2005. As the relevant plant and machinery was acquired before 31/3/2005, the AO has held that additional depreciation is not allowable to the assessee. Ld. DRP has upheld 20 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
such action of the AO. Aggrieved, the assessee has filed aforementioned grounds of appeal.
25. Ld. AR submitted that though asset was acquired before 31/3/2005 but it was installed after 31/3/2005. Referring to the language of the section which is reproduced below, it was submitted by Ld. AR that the words "after the 31st day of March, 2005" should be read only with "installed" and not with word "acquired".
"(iia) in the case of any new machinery or plant (other than ships and aircrafts), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or things [or in the business of generation or generation and distribution of power], a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii);"
26. On the other hand, Ld. DR relied upon the order passed by A.O and Ld. DRP.
27. We have heard both the parties and their contentions have carefully been considered. In our opinion the words "after the 31st day of March, 2005"
have to be read with the words " acquired and installed". Therefore, finding no force in the submissions of Ld. A.R as the assets admittedly have been acquired before 31/3/2005, we dismiss this ground.
28. Apropos ground No.4, the assessee is a joint venture company in which KSB AG Group of Germany is the joint venture partner. M/s. KSB Germany Group has various subsidiaries and associates in different countries and the assessee is one of the associates of the said group. According to the facts submitted by the assessee before Ld. DRP, KSB Germany Group had decided to implement SAP programme for all its subsidiaries and associates in order to synchronize and integrate their business functions, management control, management reporting etc. M/s. KSB Germany had acquired SAP programme and therefore, they were owner of the said software. In order to facilitate the 21 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
use of SAP programme in India by the assessee, KSB Germany was requested to provide services relating to data preparation, data migration, consultation, establishment of connection links, data center operation and various other services. The assessee did not purchase SAP programme but its systems were modified to adopt the SAP programme on KSB Germany for which an agreement was entered into by the assessee with KSB Germany on 21/12/2005, according to which following services were to be provided.
"a) SAP interface to legacy systems, infrastructure coonsultancy and all other functional consultancy;
b) Preparation for installation of SAP Programme
c) Providing services of expert external consultants for providing data migration and technical architecture
d) Installation of networking between India and Germany
e) WAN connection
f) Application and software support including SAP and Oracle licenses, its annual maintenance charges, charges for hosting our data services, backup and archiving services, support for operation of the servers.
g) Acceptable quality f service and response to users in terms of application response, communication speed, system availability, helpdesk, resolution of queries / problems."
For this purpose the assessee had made the following payments during the year under consideration.
Euro
(a) Travellling cost of KSB AG Consultants 33880
(b) Daily allowance of KSB AG Consultants 1316
(c) External consultants for migration and
Technical architecture 94400
(d) Interface to sub-systems 85000
(e) Consultation charges of KSB AG Consultants 527950
However, Ld. DRP has held that these expenditure are of capital in nature. According to Ld. DRP the assessee had derived benefit which is enduring in nature, therefore, AO has rightly treated it as capital expenditure. The assessee is aggrieved, hence, has filed aforementioned ground.
22 ITA No.8496/Mum/2010 & OthersM/s.KSB Pumps Ltd..
29. The AO also disallowed the benefit of depreciation on the ground that such SAP programme was implemented only w.e.f. 1/10/2007 and as capital asset created by the assessee was not put to use in the year under consideration, therefore, depreciation is also not allowable. As against such case of AO, it is the case of Ld. AR that these expenditure are of revenue in nature and are allowable. For this proposition Ld. AR has relied upon the decision of Hon'ble Bombay High Court in the case of CIT vs. Raychem RPG Ltd. 346 ITR 138 (Bom), wherein it has been held that Tribunal was right in allowing the claim of the assessee in respect of purchase of software which did not form part of assessee's profit making apparatus.
30. On the other hand, Ld. DR relied upon the order passed by Ld. DRP and A.O.
31. We have heard both the parties and their contentions have carefully been considered. In the submissions made before Ld. DRP it has been made clear by the assessee that assessee did not purchase SAP programme. It's existing structure of software was made compatible by the KSB Germany for which an agreement was entered into between the assessee and KSB Germany, copy of which was also filed before Ld. DRP. The nature of expenditure were also given which include Travellling cost of KSB AG Consultants and External consultants for migration and Technical architecture, Interface to sub- systems and Consultation charges of KSB AG Consultants. None of these expenditure has been incurred for acquiring any asset. The decision of Hon'ble Bombay High Court in the case of CIT vs. Raychem RPG, 346 ITR 138 (supra) will be squarely applicable to the facts of the case as by incurring these expenditure the assessee has facilitated its operations and incurring such expenditure which will enable the management to conduct its business more efficiently and these expenditure also are not in the nature of profit making 23 ITA No.8496/Mum/2010 & Others M/s.KSB Pumps Ltd..
apparatus. Therefore, we hold that these expenditure are allowable as revenue expenditure. This ground is allowed.
32. Apropos Ground No.5, we have heard both the parties on this issue. Ld. AR has filed before us a copy of AIR information. It was observed that most of the entries in AIR information have been reconciled by the assessee. However, the entries in respect of one party namely M/s. S.D. Engineers have not been reconciled. It is the case of the assessee that though it has dealt with this party but the entries mentioned in the AIR information do not belong to it. We have carefully gone through the list of AIR information and we found that not only the name of the party is given but amount and date is also given. Therefore, in the facts and circumstances of the case we consider it just and proper to restore this issue to the file of AO with a direction to call information from the said party and after calling such information confront the same to the assessee. By adopting such course this issue will be re-adjudicated as per law. We direct accordingly. This ground is considered as allowed for statistical purposes.
Assessee's Appeal for A.Y 2007-08:
33. Ground No.2 is similar to Ground No.5 of assessment year 2006-07. This issue is also restored back to the file of AO with similar directions and this ground is considered as allowed for statistical purposes.
Revenue's Appeal for A.Y.2007-08:
34. Ground No.1 is similar to Ground No.4 of assessee's appeal for A.Y 2006-
07. following the said decision we hold that the expenses incurred by the assessee in respect of SAP are revenue in nature. This ground of the revenue is dismissed.
24 ITA No.8496/Mum/2010 & OthersM/s.KSB Pumps Ltd..
35. In the result:
(i) Cross appeals for A.Y 2004-05 are partly allowed.
(ii) Assessee's appeal for 2006-07 is partly allowed.
(iii) Assessee's appeal for A.Y 2007-08 is allowed for statistical purposes.
(iv) Revenue's appeal for A.Y. 2007-08 is dismissed.
Order pronounced in the open court on 08/08/2013 आदे श क घोषणा खले ु यायालय म दनांकः 08 /08/2013 को क गई ।
Sd/- Sd/-
(नरे कमार
ु ब लै या / N.K.BILLAIYA) (आय.पी. बंसल / I.P. BANSAL)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
मंुबई Mumbai; दनांक Dated 08/08/2013
आदे श क त ल प अ े षत/Copy
षत of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु (अपील) / The CIT(A)-
4. आयकर आयु / CIT
5. वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / DR, ITAT,
Mumbai
6. गाड फाईल / Guard file.
आदे शानसार
ानसार
ु / BY ORDER,
स या पत त //True Copy//
उप/सहायक
उप सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण,
धकरण मंब
ु ई / ITAT, Mumbai
व. न.स./Vm, Sr. PS