2016 (3) TMI 826 - AT - Income Tax

Tribunal decision: Transfer pricing method remitted, warranty provision disallowed. Arm's Length Price analysis emphasized.

M/s. Kohler India Corp. P. Ltd Versus Deputy Commissioner of Income-tax, Circle -11 (5), Bangalore

The Tribunal partly allowed the appeal, remitting the transfer pricing method issue back to the TPO/AO for fresh consideration and directing the AO to ... Transfer pricing adjustment - MAM selected - whether RPM can be rejected as MAM? - Held that:- Before rejecting the RPM, TPO should have made an analysis to see whether the required data regarding the set of comparables dealing in similar products could be obtained from public data bases. Only if it can be shown that the adjustment specified in the above Rule was not possible, RPM can be rejected as MAM. In he present case assessee was selling kitchen and bath fittings, and whether there were other comparables in similar business sufficient enough to make a representative sample has not been verified by any of the lower authorities. The question whether RPM is the MAP depends on such an analysis. We are therefore of the opinion that the matter as to the selection of MAM and also the pricing of international transactions of the assessee with regard to its distribution segment requires a fresh look by the TPO / AO. We set aside the orders of authorities below and remit the issue back to the file of TPO / AO for consideration afresh Warranty disallowed - Held that:- While it is true that assessee had a present obligation on account of warranty resulting out of its sales and it was also probable that there could be an outflow of resources for settling such obligation, the third condition, viz., making of a reliable estimate has not been done by the assessee. In our opinion, unless and until scientific data is produced by an assessee in support of the estimate of warranty provisioning, an estimate cannot be presumed as a reliable one. Assessee having failed to do so, disallowance was rightly done by the lower authorities. We do not find any reason to interfere - Decided against assessee Expenditure paid to the Registrar of Companies for increasing authorised capital disallowed - Held that:- It is clear that once the type of expenditure mentioned under subsection (2) is incurred by an assessee, it shall be allowed a deduction as per sub-section (1) in the manner specified therein. Thus it is clear that AO when he had made disallowance of the share issue expenditure in the nature of fees paid to Registrar of Companies for increasing authorised capital, he ought to have allowed the amortisation of such expenditure u/s.35D(1) of the Act. DRP had accepted this claim of the assessee at para 10.2 of its order. We therefore direct the AO to grant amortisation of such expenditure to the assessee as specified u/s.35D of the Act Issues Involved:1. Rejection of Resale Price Method (RPM) and adoption of Transactional Net Margin Method (TNMM) for transfer pricing.2. Disallowance of provision for warranty.3. Disallowance of expenditure paid to the Registrar of Companies for increasing authorized capital.Detailed Analysis:1. Rejection of Resale Price Method (RPM) and Adoption of Transactional Net Margin Method (TNMM) for Transfer Pricing:The primary issue revolved around the method used for determining the Arm's Length Price (ALP) of international transactions. The assessee used the Resale Price Method (RPM) for its distribution segment, arguing that it was merely reselling finished goods purchased from its Associated Enterprise (AE) without any value addition. The Transfer Pricing Officer (TPO) rejected RPM, citing that the required adjustments for differences in international transactions were not feasible, and instead adopted the Transactional Net Margin Method (TNMM).The TPO's stance was that the assessee was not a mere reseller but had a substantial marketing network and incurred significant advertisement and selling expenses. The TPO used Euro Merchandise (India) Ltd as a comparable company, which had a Profit Level Indicator (PLI) of 17.72%, leading to an upward adjustment of Rs. 19,61,28,232.The Dispute Resolution Panel (DRP) upheld the TPO's decision, noting that the assessee performed value-added services and was not a distributor simplicitor. The DRP also mentioned that the assessee started manufacturing similar items in later years, justifying the use of TNMM.The Tribunal observed that the TPO should have conducted a detailed analysis to verify whether the products sold by the assessee were comparable to those sold by Euro Merchandise (India) Ltd or other similar companies. The Tribunal emphasized the importance of a close comparison of products when RPM is suggested as the Most Appropriate Method (MAM). The Tribunal set aside the orders of the lower authorities and remitted the issue back to the TPO/AO for fresh consideration, keeping the issues raised by the assessee open and directing the AO to consider the correct value of the purchase while computing the ALP.2. Disallowance of Provision for Warranty:The assessee claimed a provision for warranty amounting to Rs. 50,78,903, which the AO disallowed, considering it a contingent liability. The DRP directed the AO to reconsider the provision in light of the Supreme Court's judgment in Rotork Controls India (Pvt) Ltd vs CIT.The AO, however, maintained that the assessee did not meet the conditions laid down by the Supreme Court for allowing a warranty provision. The AO noted that except for two items, the warranty period did not exceed three years, and the assessee did not write back excess provisioning in subsequent years.The Tribunal upheld the AO's disallowance, stating that the assessee failed to provide scientific data to support the estimate of the warranty provision. The Tribunal emphasized that a reliable estimate is crucial for allowing a warranty provision, which the assessee could not demonstrate.3. Disallowance of Expenditure Paid to the Registrar of Companies for Increasing Authorized Capital:The assessee incurred Rs. 81,90,000 as fees paid to the Registrar of Companies for increasing its authorized capital, which the AO disallowed. The assessee argued that it should be eligible for amortization of such expenditure under Section 35D of the Income-tax Act.The Tribunal noted that Section 35D allows amortization of specified preliminary expenses, including legal charges for drafting the Memorandum and Articles of Association and fees for registering the company. The DRP had accepted the assessee's claim for amortization. The Tribunal directed the AO to grant amortization of the expenditure under Section 35D, allowing the ground partly.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal remitting the issue of the appropriate transfer pricing method back to the TPO/AO for fresh consideration and directing the AO to grant amortization of the expenditure incurred for increasing authorized capital. The disallowance of the warranty provision was upheld.