2018 (3) TMI 1794 - AT - Income Tax

Tribunal Upholds TNMM Approach, Rejects Revenue's Appeal

Tetra Pak India Pvt. Ltd. Versus Dy. Commissioner of Income Tax, Circle – 7, Pune And Vice-Versa.

Tetra Pak India Pvt. Ltd. Versus Dy. Commissioner of Income Tax, Circle – 7, Pune And Vice-Versa. - TMI Issues Involved:1. Aggregation approach for benchmarking international transactions.2. Disallowance of provision for warranty.3. Disallowance of bad debts written off.4. Disallowance under Section 40(a)(i) for non-deduction of TDS on certain payments.5. Application of Comparable Uncontrolled Price (CUP) method versus Transactional Net Margin Method (TNMM).Detailed Analysis:1. Aggregation Approach for Benchmarking International Transactions:The assessee adopted the aggregation approach for benchmarking its international transactions using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) accepted TNMM for most transactions but used the Comparable Uncontrolled Price (CUP) method for a small segment. The Dispute Resolution Panel (DRP) accepted the aggregation approach for the assessment years 2009-10 and 2010-11. The Tribunal upheld the DRP’s decision, stating that the business strategy and interlinked nature of transactions justified aggregation. The Tribunal dismissed the Revenue’s appeal, affirming that the aggregation approach was appropriate.2. Disallowance of Provision for Warranty:The assessee contested the disallowance of Rs. 2,95,36,591/- for warranty provisions. The Tribunal referenced its earlier decisions in the assessee's own case for assessment years 2002-03, 2004-05, and 2010-11, where similar disallowances were deleted. The Tribunal cited the Supreme Court's decision in Rotork Controls India (P) Ltd. Vs. CIT, which recognized the provision for warranty as a legitimate accounting practice. Consequently, the Tribunal deleted the disallowance for the current assessment year, aligning with its previous rulings.3. Disallowance of Bad Debts Written Off:The assessee challenged the disallowance of Rs. 71,38,611/- for bad debts written off. The Tribunal referred to its decision in the assessee's case for assessment year 2010-11, where the disallowance was deleted based on the Supreme Court's ruling in T.R.F. Ltd. Vs. CIT. The Tribunal found no distinguishable facts for the current year and allowed the assessee’s claim for bad debts, emphasizing compliance with Section 36(1)(vii).4. Disallowance under Section 40(a)(i):The assessee disputed the disallowance of Rs. 9,44,43,764/- under Section 40(a)(i) for non-deduction of TDS on payments for software licenses, IT support services, training, and other services. The Tribunal noted that the disallowance was based on retrospective amendments to Section 9(1)(vi). The Tribunal directed the Assessing Officer to recompute the disallowance in line with the outcome of the assessee’s pending appeal under Section 201 before the Commissioner of Income Tax (Appeals).5. Application of CUP Method vs. TNMM:The Revenue argued that the CUP method should be applied to benchmark the export of packaging material to the assessee’s Associated Enterprises (AEs). The Tribunal observed that the TPO accepted TNMM for most transactions and only applied CUP to a small segment without a valid basis for ad hoc adjustments. The Tribunal cited decisions in Amphenol Interconnect India (P.) Ltd. and Intervet India (P.) Ltd., which rejected the selective application of CUP when TNMM was accepted for the majority of transactions. The Tribunal upheld the DRP’s acceptance of TNMM for the entire set of transactions.Conclusion:The Tribunal partly allowed the assessee's appeals, deleting disallowances for warranty provisions and bad debts, and remitting the disallowance under Section 40(a)(i) for recomputation. The Tribunal dismissed the Revenue’s appeal, affirming the aggregation approach and the use of TNMM for benchmarking international transactions.