2018 (3) TMI 1794 - AT - Income Tax

Tribunal Upholds TNMM Approach, Rejects Revenue's Appeal

The Tribunal upheld the aggregation approach for benchmarking international transactions using the TNMM, dismissing Revenue's appeal. It allowed the ... Deduction on account of provision for warranty - HELD THAT:- As decided in own case [2017 (8) TMI 1565 - ITAT PUNE] the claim of the assessee on account of warranty provision is allowed by the Tribunal in assessee’s own case in the A.Y. 2003-04. Ld. Departmental Representative has not brought anything on record to controvert the above finding of the Tribunal. Therefore, we find that the order of CIT(A) is in tune with the decision of the Tribunal. Therefore, the decision of the CIT(A) given is fair and reasonable and it does not call for any interference. Accordingly, Ground raised by the Revenue is dismissed. Disallowance of claim of bad debts written - HELD THAT:- No distinguishable facts have been brought to our notice by Revenue in assessment year under appeal as compared earlier year 2010-11 . It is not the case of Revenue that the assessee has not written off bad debts in the books of account. Thus, in view of the law laid down by the Hon’ble Apex Court in the case of TRF Ltd. Vs. Commissioner of Income Tax [2010 (2) TMI 211 - SUPREME COURT] and the facts of case, ground No. 2 raised in the appeal by assessee is allowed. Disallowance u/s. 40(a)(i) - contention of assessee is that the provisions of section 40(a)(i) have been invoked in the assessment year under appeal on the basis of amendment introduced by the Finance Act 2012 to section 9(1)(vi) by insertion of Explanations 5 and 6 to the section with retrospective effect from 01-06-1976 - HELD THAT:- No such disallowance can be made when at the relevant point of time the provisions were not in existence. AR has further submitted that the appeal of assessee arising out of proceeding u/s. 201 is pending before Commissioner of Income Tax (Appeals). The directions may be given to Assessing Officer to follow the order of Commissioner of Income Tax (Appeals) in aforesaid proceedings while making disallowance u/s. 40(a)(i) of the Act. In view of the prayer made by ld. AR, the ground No. 3 raised in appeal is remitted back to the Assessing Officer with a direction to recompute disallowance u/s. 40(a)(i) in line with outcome of appeal of assessee pending before the Commissioner of Income Tax (Appeals) in proceedings u/s. 201 of the Act. Accordingly, ground No. 3 raised in appeal by assessee is allowed for statistical purpose. Aggregation approach accepted by CIT (Appeals) - HELD THAT:- Taking into consideration the facts of the case, US transfer price regulations, guideline notes issued by ICAI and OECD transfer pricing guidelines passed a detailed order upholding the order of Commissioner of Income Tax (Appeals) and dismissed the grounds raised by Revenue in own case [2017 (9) TMI 1836 - ITAT PUNE] Accepting TNMM adopted by assessee for benchmarking its international transactions in Export packaging material segment - HELD THAT:- TPO accepted TNMM applied by assessee for benchmarking majority of international transactions with its AE. Only on small segment of packaging solutions the TPO disputed TNMM and applied CUP for benchmarking international transactions. Further, the TPO granted ad hoc adjustment of 5% for marketing functions and another ad hoc adjustment of 5% for royalty component without specifying the basis for granting such adjustments. Once, the TPO has accepted TNMM as the most appropriate method for benchmarking substantial section of international transactions, the TPO cannot dispute application of the most appropriate method in respect of marginal segment of same transaction. The Co-ordinate Bench of Tribunal in the case of Intervet India (P.) Ltd. Vs. Deputy Commissioner of Income Tax [2016 (7) TMI 20 - ITAT PUNE] rejected such approach of TPO in applying CUP for determining ALP on small segment of transaction. 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.