2024 (9) TMI 355 - AT - Income Tax

Assessee's custom duty adjustment claims dismissed while multiple transfer pricing issues remitted to TPO for fresh consideration

ITAT Bangalore dismissed the assessee's appeal regarding custom duty adjustment in manufacturing segment, noting the assessee admitted no such adjustment ... Transfer pricing adjustment - arm's length price - customs duty adjustment - base cost adjustment - working capital adjustment - most appropriate method (TNMM v. RPM v. CUP) - comparability analysis - allowability of payments to headquarters for services - provision for warranty - treatment on reversal - principle of consistency in transfer pricing - remand to Transfer Pricing Officer for fresh examinationCustoms duty adjustment - comparability analysis - Rejection of the assessee's claim for adjustment of excess customs duty in computing operating margins of the manufacturing segment - HELD THAT: - The Tribunal examined the TPO's finding that adjustment for customs duty was not justified because the assessee failed to demonstrate that imported components differed functionally from local components or that duty payment alone warranted adjustment to comparables' margins. The assessee's submissions before DRP were general and unsupported by data or analysis establishing distinctive characteristics or impact on price/cost. The assessee conceded that similar claims were not allowed in prior years and that it ceased claiming such adjustment from AY 2016-17. The Tribunal relied on the TPO's reasoning and the Sony India precedent cited by the TPO, and observed that the case laws relied on by the assessee were on different facts and did not persuade the Bench to disturb the rejection. [Paras 13]Claim for customs duty adjustment rejected.Base cost adjustment - comparability analysis - Rejection of the claim for adjustment of base cost in the manufacturing segment - HELD THAT: - The assessee did not produce material to show that the base cost adjustment was warranted; it admitted that such adjustment was not allowed in earlier years and discontinued claiming it from AY 2016-17. In absence of supporting evidence to demonstrate relevant factual parity with years where adjustment may have been allowed, the Tribunal found no infirmity in the DRP/AO conclusion rejecting the adjustment. [Paras 14]Claim for base cost adjustment rejected.Principle of consistency in transfer pricing - remand to Transfer Pricing Officer for fresh examination - Remand of the claim for proportionate adjustment (consistency-based claim) to the TPO for fresh consideration - HELD THAT: - The assessee sought a proportionate adjustment on the basis that the TPO had allowed such adjustment for AY 2013-14. The Tribunal reiterated that each assessment year is distinct but acknowledged that consistency in revenue approach may apply if facts remain unchanged. As the assessee failed to place adequate materials to establish that the impugned year's facts are akin to AY 2013-14, the Tribunal remitted the issue to the TPO for fresh consideration in accordance with law and on production of relevant material. [Paras 15]Issue remitted to the TPO for fresh decision.Most appropriate method (TNMM v. RPM v. CUP) - remand to Transfer Pricing Officer for fresh examination - Appropriateness of TNMM adopted by assessee for trading segment (instead of RPM) remitted to TPO for fresh consideration - HELD THAT: - The assessee contended that RPM applied in AY 2013-14 should be applied in AY 2014-15 by virtue of functional similarity and the consistency principle. The Tribunal observed differences in goods sourced from AEs and non-AEs and noted limited advertising/packing expenses disclosed by the assessee. Given factual questions and the need to verify whether the impugned year's facts align with AY 2013-14, the Tribunal directed the TPO to re-examine method selection; it also directed that minimal sales promotion/advertising expense disclosed be taken into account. [Paras 16, 19]Issue remitted to the TPO for fresh consideration; allowed for statistical purposes.Comparability analysis - operating mark-up computation - remand to Transfer Pricing Officer for fresh examination - Re-examination of the TPO's rejection of the assessee's comparability analysis and the computation of operating mark-up for trading and distribution segment - HELD THAT: - The Tribunal found these grounds to be intertwined with the method-selection issue for the trading segment. Given that method selection and AMP expense treatment were set aside to the TPO, the Tribunal directed the TPO to freshly examine the assessee's comparables and the computation of operating mark-up in accordance with law and on production of supporting material. [Paras 21, 23]Comparability and operating mark-up issues remitted to the TPO for fresh examination; allowed for statistical purposes.Working capital adjustment - burden of proof - failure to provide data - remand to Transfer Pricing Officer for fresh examination - Remand of the assessee's claim for working capital adjustment in manufacturing and trading segments to the TPO for fresh consideration - HELD THAT: - While recognizing that a material difference in working capital may warrant adjustment, the Tribunal observed that the assessee failed to demonstrate the impact of such difference with appropriate data before lower authorities. The assessee, however, asserted ability to produce TP documentation and other materials. In the interest of justice the Tribunal remitted the issue to the TPO and directed the assessee to furnish all necessary details for verification. [Paras 26, 27]Issue remitted to the TPO for fresh examination; allowed for statistical purposes.Foreign exchange fluctuation - Claim for disallowance relating to foreign exchange fluctuation loss not pressed before the Tribunal - HELD THAT: - The assessee did not press ground no. 12 at the hearing. The Tribunal recorded that the ground was not pressed and declined to adjudicate it on merits. [Paras 28]Ground dismissed as not pressed.Allowability of payments to headquarters for services - TNMM v. CUP - Allowability of payments to the headquarters for various support services; rejection of Revenue's disallowance and acceptance that expense genuineness does not require demonstration of direct commercial benefit - HELD THAT: - The assessee paid amounts to its AE for a suite of headquarters services and benchmarked the payments using TNMM; the TPO applied the CUP method and disallowed the payments asserting lack of benefit. The Tribunal held that the AO/TPO cannot sit in the armchair of the businessman to deny expenditure where genuineness and incurrence are shown; denial on the ground that no direct benefit accrued is not sustainable. Relying on settled law cited in the order, the Tribunal allowed the grounds and set aside the disallowance. [Paras 32, 33]Payments to headquarters for services upheld (disallowance deleted).Provision for warranty - treatment on reversal - remand to Transfer Pricing Officer for fresh examination - Remand to TPO to examine whether warranty provisions were reversed and offered to tax in subsequent year before determining allowance - HELD THAT: - The assessee stated that it reversed the warranty provisions in a subsequent year and claimed only net amounts used. The Tribunal directed the TPO to verify whether such reversals were made and offered to tax, and to decide the allowability of the provision in accordance with law on that factual basis. [Paras 35, 36]Issue remitted to the TPO for fresh examination; allowed for statistical purposes.Final Conclusion: The Tribunal upholds the TPO/DRP rejections of the customs duty and base cost adjustments, allows the claim relating to payments to headquarters for services, remits multiple factual and method-selection issues (proportionate adjustment, choice of TNMM v. RPM, comparability and operating mark-up computations, working capital adjustment, and warranty provision treatment) to the TPO for fresh consideration on production of relevant material, and dismisses the foreign exchange ground as not pressed. Issues Involved:1. Adjustment of custom duty2. Applicability of TNMM method instead of RPM method3. Rejection of comparability analysis4. Adjustment of working capital5. Disallowance of foreign exchange fluctuation6. Payments made to headquarters for services7. Addition of provision for warrantyDetailed Analysis:1. Adjustment of Custom Duty:The assessee's main grievance in the manufacturing segment was the rejection of adjustment for custom duty paid on imported spare parts. The TPO denied this adjustment, citing the decision in M/s Sony India Pvt. Ltd. v. Dy. CIT, which held that custom duty adjustment should not be allowed. The DRP upheld this decision. The assessee argued that they incur significant customs duty due to higher imports compared to comparable companies, warranting an adjustment. However, the Tribunal found the assessee's arguments too general and unsupported by material evidence. The claim was also not allowed in previous years, and the assessee stopped claiming this adjustment from A.Y. 2016-17 onwards. Thus, the Tribunal dismissed this ground of appeal.2. Applicability of TNMM Method Instead of RPM Method:The assessee contended that the TPO erred in applying the TNMM method instead of the RPM method for the trading segment. The assessee argued that the RPM method was accepted in A.Y. 2013-14 and should be applied consistently. The Tribunal directed the TPO to reconsider this issue, emphasizing the importance of consistency if the facts remain unchanged. The TPO was also instructed to consider the minimal sales promotion and advertisement costs incurred by the assessee.3. Rejection of Comparability Analysis:Grounds 8 and 9 related to the rejection of the comparability analysis conducted by the TPO. The Tribunal set aside these issues to the TPO for fresh examination, in line with the directions given for the trading segment.4. Adjustment of Working Capital:The assessee argued that the TPO and DRP erred in not granting working capital adjustments for the manufacturing and trading segments. The Tribunal observed that the TPO and DRP rejected the claim due to the assessee's failure to demonstrate the impact of working capital differences on profits. The Tribunal remitted this issue to the TPO for fresh examination, directing the assessee to provide necessary details and material to support their contention.5. Disallowance of Foreign Exchange Fluctuation:The assessee did not press this ground, and it was dismissed as not pressed.6. Payments Made to Headquarters for Services:The assessee paid Rs. 1,30,25,887 for various support services from its AE and benchmarked this payment using the TNMM method. The TPO rejected this method and applied the CUP method, arguing that the assessee failed to establish the receipt of services and the benefit derived. The Tribunal held that the genuineness of the expense should be considered, not the benefit derived, citing the Supreme Court's decision in S.A. Builder. The Tribunal allowed this ground, relying on judgments from the Delhi High Court.7. Addition of Provision for Warranty:The assessee claimed that the provision for warranty was reversed in subsequent years, and only the net provision utilized was claimed. The Tribunal remitted this issue to the TPO to verify the reversal of charges and decide accordingly.Conclusion:The Tribunal allowed some grounds for statistical purposes, remitted others for fresh examination, and dismissed a few based on the assessee's concession or lack of pressing. The order emphasized the need for consistency and adequate evidence in transfer pricing adjustments.