Transfer pricing and business expense disallowances: genuine intra-group services, rational warranty provisioning, and evidence-based allocation were upheld.

Ad hoc disallowance of corporate cost allocation was held unsustainable where centralized support services were proved, the allocation was proportionate, and no specific defect or non-business use was shown. Warranty provision was treated as allowable because the liability arose from sales, was computed on a scientific and consistent basis, and represented an ascertained business liability capable of reasonable estimation. The nil arm's length price adjustment for corporate support services to associated enterprises was rejected because the assessee produced agreements and contemporaneous evidence of actual services, and transfer pricing analysis cannot disregard genuine intra-group services merely by questioning business necessity. Revenue's appeals failed, and the disputed disallowances and transfer pricing adjustment were deleted.

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Issues: (i) Whether the ad hoc disallowance from corporate cost allocation was sustainable. (ii) Whether the provision for warranty expenses was allowable. (iii) Whether the transfer pricing adjustment on payments for corporate support services to associated enterprises could be sustained at nil arm's length price.

Issue (i): Whether the ad hoc disallowance from corporate cost allocation was sustainable.

Analysis: The assessee established that it received centralized support services under an agreement and that the cost was allocated on a proportionate basis without mark-up. The Assessing Officer accepted receipt of services but disallowed a portion on an ad hoc basis without demonstrating that the expenditure was not incurred for business purposes. A disallowance based on presumption, without a specific defect in the allocation or evidence of non-business use, was not justified.

Conclusion: The ad hoc disallowance from corporate cost allocation was not sustainable and was deleted.

Issue (ii): Whether the provision for warranty expenses was allowable.

Analysis: The assessee had a consistent warranty practice linked to sales, followed an average-based method using past free-of-cost dispatch data, and also created an additional specific provision for a major customer. The liability was not disputed, the method was scientific, and the treatment was consistent with earlier and later years. The provision satisfied the accepted principle that an ascertained business liability, even if estimated, may be deducted when computed on a rational basis.

Conclusion: The provision for warranty expenses was allowable.

Issue (iii): Whether the transfer pricing adjustment on payments for corporate support services to associated enterprises could be sustained at nil arm's length price.

Analysis: The assessee produced agreements, emails, debit notes, and a contemporaneous certificate showing receipt of services and the basis of charge. The dispute was identical to an earlier year in the assessee's own case, where the same type of support services had been held to be real services and not to warrant a nil valuation. The transfer pricing authority cannot substitute its view of business necessity for that of the assessee, and the transaction had to be benchmarked under the proper method rather than being rejected outright at nil merely because the benefit was questioned.

Conclusion: The nil transfer pricing adjustment on corporate support services was unsustainable and was deleted.

Final Conclusion: The Revenue's appeals were dismissed, while the assessee's appeals were allowed to the extent of deletion of the transfer pricing adjustment and the disputed cost-allocation and warranty disallowances.

Ratio Decidendi: A transfer pricing authority cannot determine arm's length price at nil by questioning the commercial expediency or business need of genuine intra-group services, and an ad hoc disallowance unsupported by evidence cannot survive where the expenditure and liability are shown to be business-related and rationally computed.

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