2018 (10) TMI 2033 - AT - Income Tax

Revenue's appeal dismissed as arbitrary 25% capital cost disallowance of Rs. 45 lacs rejected despite accepted service genuineness

The Deputy Commissioner of Income Tax, Circle-8, Pune Versus Eaton Fluid Power Limited And (Vice-Versa)

ITAT Pune dismissed Revenue's appeal regarding capital cost allocation disallowance, ruling that AO's arbitrary 25% disallowance (Rs. 45 lacs) lacked ... Disallowance of Capital Cost Allocation - AR has pointed that as per cost allocation policy the cost of services is allocated on the basis of head count or any other basis as may be mutually decided by the parties depending on the nature of services - HELD THAT:- AO has not disputed the receipt of services by the assessee. An ad hoc disallowance of 25% i.e. Rs.45 lacs out of total corporate cost allocation has been made by the AO for the reason that the allocation of cost has been made on subjective basis. The reasoning for making such disallowance in arbitrary manner is without any merit. Once, the AO has accepted the genuineness of expenditure and the services rendered, ad hoc disallowance of 25% of the expenditure on mere presumptions or assumptions is not sustainable. No reasoning whatsoever has been given by the AO to show that the expenditure disallowed is not for the business of assessee. We do not find any infirmity in the directions of DRP reversing the findings of AO in draft assessment order on this count. Accordingly, ground No. 1 raised in the appeal by Revenue is dismissed. Disallowance of warranty expenses - DR submitted that while making provision for warranty the assessee has failed to show that the provision was made on some scientific and systematic basis - HELD THAT:- The manner and the basis for making the provision in all the assessment years including the assessment year under appeal is identical. This fact has not been disputed by the Revenue. Therefore, we are of considered that the principle of consistency demands the provision created by the assessee for warranty deserves to be allowed. We further observe that the assessee has followed average of percentage of “Free of Cost” dispatches on sales made in past three years for creating provision for warranty. In addition the assessee has made provision for Rs.49 lacs towards warranty for supplies made to one of its major customer. The provision for warranty created by the assessee is based on well calculated scientific method. The assessee has made warranty provision in line with the principles enunciated in the case of Rotork Controls India Pvt. Ltd [2009 (5) TMI 16 - SUPREME COURT]. TP adjustment - international transactions pertaining to payments made to AEs for Corporate Support Services - HELD THAT:- DR has not able to controvert the findings of Co-ordinate Bench in 2008-09 [2018 (6) TMI 1266 - ITAT PUNE] No contrary decision has been brought to our notice by the Revenue on similar issue. It is also not disputed that the nature of services received by the assessee from the AEs in the assessment year under appeal are in any manner different from the services received by the assessee from its AEs in assessment year 2008-09. Thus, in view of undisputed facts we follow the order of Tribunal in assessee’s own case and allow ground Nos. 2 to 4 raised in the appeal by assessee in same terms. Adoption of internal TNMM for benchmarking manufacturing segment - HELD THAT:- Co-ordinate Bench following its own decision in assessment year 2007-08 [2015 (5) TMI 644 - ITAT PUNE] upheld internal TNMM for the purpose of benchmarking international transactions of purchase of raw material and components from AEs as well as sale of finished goods effected to AEs. The Tribunal further observed that since the profitability under the AE segment was higher than that of the transactions under third party segment, no adjustment on account of arm’s length price was required to be made. The ld. AR submitted that there has been no change in the facts of the case vis-à-vis assessment years 2007-08, 2008-09, 2009-10 and 2010-11. Hence, on principle of consistency the ground Nos. 1 to 3 raised by Revenue deserves to be rejected. Issues Involved:1. Disallowance of Corporate Cost Allocation2. Disallowance of Warranty Expenses3. Transfer Pricing Adjustment for Corporate Support Services4. Adoption of Internal TNMM for Benchmarking Manufacturing Segment5. Computation of Working Capital Adjustment6. Charging of Interest under Sections 234B and 234CIssue-wise Detailed Analysis:1. Disallowance of Corporate Cost Allocation:The Revenue challenged the deletion of Rs. 45,00,000/- disallowed by the Assessing Officer (AO) out of the Corporate Cost Allocation of Rs. 1,80,22,920/-. The AO made an ad hoc disallowance of 25%, claiming the allocation was not wholly and exclusively for the assessee's business. The Dispute Resolution Panel (DRP) found merit in the assessee's method of cost allocation and reversed the AO's findings. The Tribunal upheld the DRP's decision, stating that once the AO accepted the genuineness of the expenditure and services rendered, an ad hoc disallowance based on mere presumptions was unsustainable.2. Disallowance of Warranty Expenses:The Revenue contested the deletion of Rs. 42,60,057/- disallowed by the AO as part of the warranty expenses. The AO claimed the provision was not based on a scientific method. The DRP found that the provision for warranty was made based on past trends and industry practices, following the principles laid down by the Supreme Court in Rotork Controls India Pvt. Ltd. vs. CIT. The Tribunal agreed with the DRP, noting that the provision was made on a well-calculated scientific basis and consistent with previous and subsequent assessment years.3. Transfer Pricing Adjustment for Corporate Support Services:The assessee challenged the upward adjustment of Rs. 1,23,36,988/- made by the AO/DRP/TPO for payments made to Associated Enterprises (AEs) for Corporate Support Services, which were determined to be not at arm's length. The Tribunal noted that similar issues were previously adjudicated in favor of the assessee in its own case for the assessment year 2008-09. The Tribunal reiterated that the TPO cannot question the business decisions of the assessee and must only determine the arm's length price. The Tribunal allowed the assessee's appeal, stating that the services received from AEs were substantiated with agreements and other documents.4. Adoption of Internal TNMM for Benchmarking Manufacturing Segment:The Revenue questioned the adoption of the internal Transactional Net Margin Method (TNMM) for benchmarking the manufacturing segment. The Tribunal upheld the use of internal TNMM, as previously decided in the assessee's own case for assessment years 2007-08 and 2008-09. The Tribunal found that the internal comparables provided a more direct and closer relationship to the tested transactions, and the segmentation of the manufacturing segment into AE and non-AE segments was fair and apt.5. Computation of Working Capital Adjustment:The Revenue's ground on the practical difficulty in computing Working Capital Adjustment was deemed academic since the Tribunal upheld the adoption of internal TNMM as the most appropriate method. Therefore, this issue was not deliberated upon further.6. Charging of Interest under Sections 234B and 234C:The assessee's challenge to the charging of interest under Sections 234B and 234C was dismissed, as the charging of interest is consequential and mandatory.Summary of Judgments:- The appeals of the Revenue for both assessment years (2010-11 and 2011-12) were dismissed.- The appeals of the assessee for assessment years 2010-11 and 2011-12 were partly allowed.- The Tribunal upheld the DRP's decisions on disallowance of Corporate Cost Allocation and Warranty Expenses.- The Tribunal reaffirmed its previous rulings on Transfer Pricing Adjustments and the adoption of internal TNMM for benchmarking manufacturing segments.