2023 (8) TMI 570 - AT - Income Tax

Tribunal grants appeal to assessee, directing AO and TPO to delete adjustments.

The Tribunal allowed the appeal of the assessee on various grounds, directing the AO and TPO to follow its directions and delete the respective ... TP adjustment - MAM - Rejection of Internal Comparable Uncontrolled Price Method adopted as the most appropriate method by the Appellant - HELD THAT:- We noticed from the documents submitted by the assessee that this issue has been continuously held in favour of the assessee that the CUP is the most appropriate method for determining the ALP of the assessee for the importing of goods for manufacturing segment. As relying on the assessee’s own case for the assessment year (AY) 2015-16 [2020 (3) TMI 471 - ITAT BANGALORE] allow the grounds raised by the assessee that the CUP is MAM for the determination of international transactions for the computation of PLI in above terms. AMP Expenditure pertaining to trading segment - international transaction - HELD THAT:- We are of the view that this issue is covered from the order of the co-ordinate bench of Tribunal in favour of the assessee in the assessee’s own case for assessment year 2015-16 [2020 (3) TMI 471 - ITAT BANGALORE] it would be just and appropriate to set aside the issue of determination of net margin of the assessee and in the trading segment, as claimed by the assessee in Scenario-3 before the TPO. If the margins are accepted as at arm’s length and then applying the principles laid down in the case of Sony Ericsson Mobile Communications India P. Ltd. [2015 (3) TMI 580 - DELHI HIGH COURT] incurring of AMP expenses cannot be treated as international transaction and consequently determination of ALP would not arise for consideration at all. We therefore set aside the order of the AO and remand the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method and if by such method the price received in the international transaction is considered as at arm’s length, then no separate addition needs to be made. Disallowance of Provision for Warranty - DR submitted that the assessee has not demonstrated that there is any scientific method adopted by the assessee - HELD THAT:- In the case on hand the method followed has not been shown to be not scientific by the revenue authorities - we are of the view that the method followed by the Assessee should be accepted as proper and the deduction should be allowed as per the provision created by the Assessee following the above judgement in assessee’s own case cited supra. AO has observed that there is huge amount of balance of the provisions are carry forwarding over the years but no details submitted year wise balance of provision for warranty before the AO, therefore, we direct to the asseesse for giving the details of provisions for warranty is outstanding year wise remained unutilized. The assessee has submitted that the period of warranty is maximum for one to three years, if the provision for warranty is unutilized for more than three years from the date of commencement of warranty of the products, it should be reversed and offered for taxation in the year of expiry of warranty. We noted from the order for the AY 2015-16 there is only opening balance plus provisions created and utilized is mentioned but there is no any entry for unutilized warranty amount found. Considering the entire facts the AO is directed to follow the direction in above terms. MAT computation - addition of provision for warranty loss to the book profit u/s 115JB - HELD THAT:- In the judgement cited by the assessee for the AY 2015-16 [2020 (3) TMI 471 - ITAT BANGALORE] in which it has been held that the provision for warrant expenses is not contingent and has to be allowed as deduction while computing income under the head “Income from Business & Profession”. As a consequence of such finding, the addition made to the book profits is to be deleted because the liability cannot be said to be contingent, accordingly, the same ought not to be added for computing book profit. Disallowance of unrealized foreign exchange loss - HELD THAT:- This issue is covered in favour of the assessee vide Hon’ble High Court of Delhi judgment in the case of Pr.CIT Vs. Simon India Ltd. [2022 (12) TMI 358 - DELHI HIGH COURT] wherein as held that loss on account of Forward Contracts, cannot be considered as speculative loss. The assessee has reinstated its debtors and creditors from the underlying transactions on the value of the foreign exchange at the year end. Thus loss is allowed u/s 37. Unrealized Foreign Exchange Loss u/s 115JB - HELD THAT:- Since we have uphold that the unrealized foreign exchange loss is ascertained liabilities and it is covered u/s 37 of the Act. therefore, the addition can not be made while calculating book profit u/s 115JB of the Act. for the year under consideration. Considering the rival submissions we allow these grounds. Issues Involved:1. Transfer Pricing (TP) Adjustment in Manufacturing Segment2. TP Adjustment on Account of Excess AMP Expenditure in Trading Segment3. Disallowance of Provision for Warranty4. Addition of Provision for Warranty to Book Profits5. Disallowance of Unrealized Foreign Exchange Loss6. Addition of Unrealized Foreign Exchange Loss to Book ProfitsIssue-wise Summary:I. TP Adjustment in Manufacturing Segment:The Tribunal addressed the assessee's contention that the Comparable Uncontrolled Price (CUP) method should be the Most Appropriate Method (MAM) for benchmarking international transactions related to the import of raw materials. The Tribunal noted that in previous assessment years, the CUP method had been consistently upheld by the ITAT and DRP. The Tribunal reiterated that the CUP method is the MAM for determining the Arm's Length Price (ALP) for the manufacturing segment and directed the TPO to apply the CUP method, thereby allowing the assessee's grounds.II. TP Adjustment on Account of Excess AMP Expenditure in Trading Segment:The Tribunal considered the adjustment made by the TPO for alleged excess Advertising, Marketing, and Promotion (AMP) expenditure, which was treated as an international transaction. The Tribunal followed the Delhi High Court's ruling in the Sony Ericsson case, which held that once the TNMM is accepted, AMP expenditure cannot be treated as a separate international transaction. The Tribunal noted that the assessee's net profit margin was within the arm's length range, and thus, no separate addition for AMP expenses was warranted. The Tribunal allowed the assessee's grounds and directed the TPO to delete the AMP adjustment.III. Disallowance of Provision for Warranty:The Tribunal examined the assessee's method for creating a provision for warranty, which was based on a scientific methodology involving machine months, repair rate, and cost per claim. The Tribunal noted that this method had been consistently accepted in previous years and upheld by the ITAT and Karnataka High Court. The Tribunal held that the provision for warranty was created on a scientific basis and allowed the assessee's claim, directing the AO to delete the disallowance.IV. Addition of Provision for Warranty to Book Profits:The Tribunal addressed the addition of the provision for warranty to the book profits under section 115JB. It held that since the provision for warranty was not contingent and had been allowed as a deduction under the head 'Income from Business & Profession,' it should not be added back while computing book profits. The Tribunal allowed the assessee's grounds and directed the AO to exclude the provision for warranty from the book profits.V. Disallowance of Unrealized Foreign Exchange Loss:The Tribunal considered the disallowance of unrealized foreign exchange loss, which was due to the restatement of debtors, creditors, and other trade advances. The Tribunal followed the Supreme Court's ruling in Woodward Governor and the Delhi High Court's ruling in Simon India Ltd., which held that such losses are not speculative and should be allowed as a business loss. The Tribunal allowed the assessee's grounds and directed the AO to allow the unrealized foreign exchange loss as a deduction under section 37.VI. Addition of Unrealized Foreign Exchange Loss to Book Profits:The Tribunal addressed the addition of unrealized foreign exchange loss to the book profits under section 115JB. It held that since the unrealized foreign exchange loss was an ascertained liability, it should not be added back while computing book profits. The Tribunal allowed the assessee's grounds and directed the AO to exclude the unrealized foreign exchange loss from the book profits.Conclusion:The Tribunal allowed the appeal of the assessee on various grounds, directing the AO and TPO to follow the Tribunal's directions and delete the respective adjustments and disallowances. The appeal was partly allowed in favor of the assessee.