TaxTMI 
TaxTMI 
2018 (4) TMI 496
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....cts and in law, the Hon'ble DRP erred in upholding the action of Ld.TPO and Ld.AO regarding rejection of Cost Plus Method (CPM) (using foreign AE as the tested party) and inappropriate application of the Transactional Net Margin Method (TNMM) (using Appellant as the tested party), thereby violating Rule 10B and Rule 10C of the Rules. 1.3. On the facts and in law, the Hon'ble DRP erred in confirming the action of the Ld.TPO and Ld.AO regarding application of TNMM on entity wide basis and not appreciating transaction by transaction approach followed by the appellant, even though the value of purchase of raw materials and components from foreign AEs constitutes only 9% of the total operating costs incurred by the appellant. 1.4. On the facts and in law, the Hon'ble DRP erred in upholding action of Ld.TPO and Ld.AO regarding incorrect recomputation of the operating profit margin of the appellant. 2. Transfer Pricing - Management Consultancy and Business Auxiliary Services (GSA charges). 2.1. On the facts and in law, based on the Hon'ble DRP directions to verify compliance with the terms of Bilateral Advance Pricing Agreement ('APA') signed between the appellant and CBDT, In....
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....ing Agreement (for subject AY) and Mutual Agreement Procedure (for AY 2008-09 to AY 2011-12) whereby GSA charges claimed by the assessee were held as an allowable business expenditure for transfer pricing purposes subject to determination of arm's length price as per specified formula. 5 Disallowance u/s 14A of the Act. 5.1 On the facts and in law, the Ld. AO the Hon'ble DRP erred in disallowing amount of INR 5,987 relating to expenditure incurred for earning tax exempt income from investments by invoking the provisions of Section 14A of the Act read with Rule 8D of the Rules without appreciating that no such income has been earned by the Appellant company during the year under consideration. 5.2. On the facts and in law, the Ld. AO and the Hon'ble DRP erred in disregarding the judgment of Hon'ble jurisdictional Delhi High Court in the case of Holcim India Private Limited (ITA No. 486/2014) 6 Disallowance of welfare expenditure under the head 'Miscellaneous expenditure'. 6.1 The Ld. A.O./ the Hon'ble DRP erred on the facts and in law, in disallowing INR 825,822 relating to expenditure incurred on welfare activities, which includes expenditure for welf....
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....to international transaction with its Associated Enterprises (AEs). After obtaining necessary approvals, the case was referred to Ld.TPO for determination of arm's length price. 3. Ld.TPO observed that assessee was engaged in the business of manufacture and sale of instant velocity joints. Ld.TPO observed that assessee had following international transactions with its A.E. Sl. No. Nature of transactions Value (Rs.) Method Applied Arm's length result Tested party result 1. Purchase of raw material & components 581,668,058 Cost Plus Method (CPM) - - 2. Sale of finished goods 45,103,917 Transactional Net Margin Method (TNMM) 0.41% 13.26% 3. Royalty on Technical KnowHow 19,863,519 Comparable Uncontrolled Price Method (CUP) 5.7% 3% 4. Trademark SubLicense Fees 97,241,060 CUP 2% 0.5%- 1.5% 5. Management Consultancy and Business Auxiliary services 384,010,443 TNMM 8.34% 5% 6. Information System/Information Technology Service Recharge 14,248,822 - Do - -Do - - Do - 7. Fees for access to Driveline E mail 1,994,486 Other Method - - 8. Testin....
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....le laid down in rule 1OC(2) of the Income Tax Rule 1962 GKN India was selected as the tested party and this year without any change of facts or business model, CPM has been used. 6. Ld.TPO has stated that from FAR analysis/comparison assessee had less complex operations and limited risks and thus TNMM would be the most appropriate method with assessee as the tested party. Ld. TPO also stated that CPM marks-up are heavily influenced by the particular accounting conventions used by an enterprise to classify cost of goods sold or operating expenses which might vary among uncontrolled parties, and reliability of CPM could also be adversely affected by factors such as cost structure, business, management efficiency etc. 7. For the above reasons ld.TPO adopted TNMM as the MAM and assessee as the tested party for benchmarking the international transaction related to purchase of raw materials and components. 8. On raising objections before DRP, DRP observed as under: "The TPO has pointed out that a subset of the change of MAM involves change of tested party also (since TNMM has been used) and the requirements of factors to be taken into account for the selection of MAM as given in....
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....as priced at manufacturing cost plus average mark-up of 30.02% and in order to determine the arm's length price assessee derived the mark-up percentage for 22 products of the Driveline Division which are sold only to 100% external customers and determined that the average cost plus mark-up earned by Driveline Division was 43.58%. He submitted that based on this analysis assessee benchmarked the international transactions with its AE at arm's length price. Ld. AR submitted that assessee is involved in the following activities in India: * Procurement and Manufacturing; * Logistics; * Sales Marketing and Distribution 10.2. It was submitted by Ld. AR that assessee cannot be taken as tested party due to the magnitude of functions carried out by assessee in India vis-a-vis the activities carried out by AE's. 10.3. On the contrary Ld. CIT,DR submitted that assessee has failed to furnish a satisfactory reply in view of selection of AE as tested party and that there is no comparison drawn out by assessee in the transfer pricing documentation regarding the functions, risks and assets of assessee vis-a-vis its AEs. He also submitted that comparables that have ....
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....requirement of minimum adjustments is also one of the most important aspect while selecting the tested party. (d) FAR study of the tested party should be detailed being less complex vis-a-vis the other entity. 10.8. However from the TP documentation filed before us in the paper book at page B-3 to B-869 of paper book volume II it is observed that assessee has not provided any details regarding FAR of AE to ascertain it to be less complex in nature. In fact assessee has only filed a letter dated 12/01/16 which demonstrates the total sales earned by AE with assessee during financial year relevant to the assessment year under consideration. It is observed from the submission dated 13/01/16 filed by assessee before ld.DCIT which is in response to the show cause notice dated 04/01/2016 that, assessee do not have financials of its AE as the same are not available on the public domain. Appendix B at page B- 933 is profitability details for products of Driveline Division (being AEs), having 100% external sales during the year ended 31/12/11. Further it is observed that the comparables selected are single set without having regard to the functions and geographical dissimilaritie....
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.... "13. Ld. counsel for the assessee submitted that the Tribunal decided the issue in favour of assessee for assessment years 1995-96 and 1996-97 and thereafter from assessment years 2001-02 to 2009-10. However, as regards the intervening period i.e. in assessment years 1997-98 to 2000-01 the data is not readily available and no cases are pending. 14. Ld. DR on the other hand supported the order of the AO. 15. We have considered the rival arguments made by both sides. We find the Tribunal in assessee's own case in ITA No.3223/Del/2005 order dated 14.09.2007 for assessment year 2001-02 has held that provision for warranty made by the assessee is on the basis of technical estimation and, therefore, such provision was in respect of ascertained liability and the quantification thereof was to be made on a later date. Accordingly, the Tribunal allowed the appeal of the assessee. Similar view has been taken by the Tribunal in assessee's own case for various other years. 16. We find the Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. vs. CIT reported in 314 ITR 62 has held that as under :- "The assessee sold value actuators. At the ....
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.... A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37." 17. Respectfully following the decision of the Tribunal in assessee's own case as well as the decision of the Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. (supra), we hold that the provision for warranty claim is an allowable expenditure. The ground raised by the assessee is allowed and the ground raised by the Revenue is dismissed." 12.4. On the con....
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.... * Aluminium Corporations, 86 ITR 11 (SC) 15.4. He submitted that these were to facilitate workers of assessee employed at factory and are allowable expenses, as they have been incurred wholly and exclusively for the purposes of assessee's business. He submitted that these were to benefit the welfare of the children of staff. 15.5. On the contrary Ld. CIT DR submitted that in the absence of details, these expenses could not be allowed. 15.6. We have perused the submissions advanced by both the sides in the light of the records placed before us. 15.7. In our considered opinion the expenditure incurred by assessee is in the nature of corporate social responsibility which is considered to be an allowable expenditure subject to fulfilment of the conditions specified in section 32 to 36 of the Act. As assessee has not filed any details regarding these expenses before us, we are unable to ascertain whether necessary criteria as stipulated under section 32-36 of the Act stands fulfilled. 15.8. We are therefore inclined to set aside this issue back to the file of Ld. AO for due verification. Assessee is directed to file all necessary documents/proof/evidences in ord....