TaxTMI 
TaxTMI 
2012 (12) TMI 1166
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.... transaction entered into by the assessee with its associated enterprise. 2.1 That the assessing officer / TPO erred on facts and in law in not reducing export incentive amounting to Rs. 78,72,603 and rebate received amounting to Rs. 33,21,586 from the cost of goods sold for computing gross profit margin for determining the arm's length price. 2.2 That the assessing officer / TPO erred on facts and in law in holding that incentive received in respect of export of finished goods, should not be taken into account for determining the profit/cost in respect of the international transaction of export. 2.3 That the assessing officer / TPO erred on facts and in law in holding that the approach of the assessee in considering export incentive for computing cost of goods sold was in violation of its Global Transfer Pricing Policy. 2.4 That the assessing officer / TPO erred on facts and in law in holding that the export incentive does not form part of cost calculation while arriving at invoice price of goods sold and hence the same cannot be reduced from the cost of goods sold. 2.5 That the assessing officer I TPO erred on facts and in law in n....
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....he sum of Rs. 18,70,000 being the provision for warranty holding the same to be contingent liability. 4.1 That the assessing officer erred on facts and in law in not appreciating that the provision for warranty is an ascertained liability incurred at the time of sales and is not a contingent liability. 5. That on the facts and circumstances of the case the assessing officer ought to have allowed deduction for excise duty on closing stock amounting to Rs. 1,05,415 disallowed in the preceding previous year on payment in the relevant year as per the provisions of section 43B of the Act. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing. 3. Transfer Pricing Issue:- The assessee is a public limited company engaged in the business of manufacture and sale of automobile tyres, tubes and flaps in the brand name of 'Goodyear'. The assessee is a subsidiary company of Goodyear Tyre and Rubber Company (GTRC), USA. The assessee during the relevant previous year, inter-alia, entered into international transactions of export of finished goods to its associated enterprises of Rs. ....
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....f this policy does not include the transfer pricing of tires between the Goodyear Tire and Rubber Company and Goodyear Canada Inc., or the sale of tires form Goodyear Brazil to any other Goodyear entity, as they are covered by separate policies. Policy The inter-company transfer price should be set to allow the Manufacturing Entity to earn a profit equal to a 5% markup. The manufacturing entity should recover inventory cost and all applicable other costs plus the 5% profit mark-up. Accordingly, the inter company selling price may include other markup to cover other directly related expense such as general and administrative expense and research and development costs. The mark up for research and development costs should be 5% for all manufacturing entities. The mark up for general and administrative expense is to be limited to recovery expenses required to conduct inter company business. Generally this will include any SAG required to support the manufacturing facility, as well as expenses related to transporting and warehousing the product, if applicable, and expense necessary with regard to other inter-company transactions such as order processing and a....
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....company receivables. The inter company payment terms established and maintained by the corporate treasury department are established based upon arm's length principles and therefore no additional compensation would be appropriate." 5. TPO observed that Govt. of India has initiated the concept of export benefits to the taxpayers to promote and stimulate the growth of exports of goods and services from India to various other countries. That the other purpose of export incentive is to earn the valuable foreign exchange for the country. That export incentives was available to the assessee only after trading exports made by the assessee. That the global transfer pricing policy of the group company talks about cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. That in none of the global transfer pricing policy, the future value of benefits which may be available in a few countries can be included as this will disturb the very basis/purpose of providing uniform return to each and every enterprise which is a member of global transfer pricing policy. TPO further observed the basic purpose of global transfer pri....
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....In that case, TPO wondered as to how can the assessee reduce it from the cost of goods sold. He observed that it is a well settled principle that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. TPO observed that the assessee's method of accounting jugglery was employed to sell goods to AE without the markup as prescribed by the assessee's global transfer pricing policy. 8. TPO asked the assessee to provide information regarding gross margin earned on export of traded goods during the relevant financial year. The assessee provided the following details:- Net sales (Rs.) 110,757,058 Purchase Price (Rs.) 110,719,519 Export Incentive Benefit (Rs.) (7,872,603) Total Effective cost (Rs.) 102,846,916 Gross Margin (Rs.) 7,910,143 Gross Margin % 7.14% On the basis of above calculation, assessee submitted that even if export were not allowed, the transaction would be at arms length. The TPO asked the assessee to provide the details of cost base that had been employed to calculate the gross margin. Assessee submitted the following calculation:- Particula....
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....is highly unlikely as per the prevalent Global Transfer Pricing Policy. Accordingly, DRP held that it found that no compelling reasons to interfere with the order of TPO in this regard. 10. Against the above order the assessee is in appeal before us. 11. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted that export incentives received for sales amounting to Rs. 7,872,603/- in respect of export of finished goods is required to be taken into account for determining the cost of such export for the following reasons:- "i) Export incentives are granted under the Import & Export Policy issued in terms of powers conferred under section 5 of the said Foreign Trade (Development & Regulation) Act, 1992. Chapter 7 of the Export Import Policy lays down various Duty Exemption and Duty Remission Schemes. DEPB Scheme is one of the Duty Remission Scheme given under the said Chapter 7 of the Export Import Policy. In order to promote exports from India, the Government has framed special schemes under which imports are permitted free of duty or at concessional rate of customs duty. Th....
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....6 41.36 49.76 5% Profit Markup 2.49 N/A N/A 50/50 Profit Split N/A 4.73 0.31 Service Charge/ RD&E (5%) 2.69 2.69 2.69 Normal V -Price 54.94 48.78 52.76 Exporter Cost Total Production (A) - See Above 39.86 47.66 Calculation Factory Cost 39.86 47.66 Freight to Port of exit 0.90 0.90 Akron Service Charge/ RD&E (5%) 2.69 2.69 SAG - Exporter 0.60 1.20 Total Exporter Cost 44.05 52.45 Importer Cost Ocean Freight 0.65 0.65 Insurance Duties 0.48 0.48 Handling/ Port Charges 0.31 0.31 Inland Freight, Brokerage, & Mic. 0.49 0.49 Other 0.01 0.01 Incremental SAD - Importer 0.56 1 Total Importer Cost 2.50 2.94 Net Selling Price To Ultimate 56.00 56.00 Customer &....
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....ed and exported to Sony Japan to utilize idle capacity of assembling facilities to enable the company to improve recovery of its fixed assembly cost. Accordingly goods were priced taking into consideration marginal cost. The taxpayer further claimed that colour T.Vs were exported at ALP and this submission was supported with reference to the following chart: PARTICULARS Local sales Export KV-XAI12P80 KV-XA21P80 PER UNIT PER UNIT Sales Value 16,138 10,676 Less: Excise duty @ 16% 1,929 Less : Sales tax @ 14% 2,010 Less: Other taxes @ 1% 144 Add: Export benefit @ 18% 1921 Comparative prices 12056 12595 The price works out to Rs. 12,056 against Rs. 12, 595 charged from Sony Japan after taking benefit permissible in export scheme @18% . ....... In the light of above evidence, we are of the view that transaction of sale of CTV to Sony Japan was carried by taxpayer at Arm's Length and. therefore, adjustment made by the TPO and upheld in appeal by the Ld. Commissioner of Income Tax (A) is not called for. It is directed to be deleted. "[Emphasis s....
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....urchased is received by the assessee for exports to AE as well as to unrelated parties. The amount of Rs. 33,21,586/- being inextricably linked to the cost of purchases, was netted off and net amount of cost of purchases of finished goods was shown in the profit and loss account. The TPO, clearly erred in holding that the said amount was not reflected anywhere in the books of accounts of the assessee. Further, it would also be noted that the TPO has himself in the order passed for the assessment year 2007-08 and 2008-09, accepted the contention of the assessee that rebate received upon purchase of goods is deductible from the value of cost of goods sold. It would be appreciated that considering the orders passed by the TPO for subsequent assessment years and the commonality of facts, there would be no reason not to deduct the amount of rebate received from the value of cost of goods sold, while determining the arms length price of export of goods for assessment year 2006-07. Although there is no res judicata in income-tax proceedings, the Supreme Court in the case of Radhasoami Satsang V. CIT: 193 ITR 321 at page 329 held that where a fundamental aspect permeating through dif....
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.....2 We have carefully considered the submissions and perused the records. 11.3 The assessee has exported finished goods, viz., tyres purchased from GSA TL amounting to Rs. 11,07,57,058 to the AEs at a mark-up of 5% over the cost of goods sold as follows: Particulars Amount in Rs. Purchase price of goods 11,07,19,519 Less: Export incentives (78,72,603) Add: Freight cost 55,37,853 Less: Rebate / Discount received (33,21,586) Total COGS 10,50,63,183 Add: 5% mark-up 52,53,159 Arm's length price of export sale of traded goods to group companies 11,03,16,342 Transfer price of export sales of traded goods to group companies 11,07,57,058 11.4 It was submitted before the TPO that for computing the gross profit margin or the mark-up from such international transactions of export of traded goods to the AEs, the export incentive amounting to Rs. 78,72,603 and rebate/discount amounting to Rs. 33,21,586 received in respect of such purchases from GSATL in terms of the Off-take agreement dated 01-09-2001 is to be deducted from the cost of goods sold. 11.5 As regards issue of reduction of export incentive from goods sold is concerned....
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....f sales, with due adjustment for increases or decreases in inventory or stock in traded, but without taking account of other expenses." 11.7 From the above it follows that while determining the gross profits from sale of goods such incentives cannot be adjusted to determine the cost of goods sold. TPO has rightly observed that export incentives does not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. We agree with the TPO that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. 11.8 Assessee's reliance of Accounting Standard (AS)-II- Verification of inventories issued by Institute of Chartered Accountant of India (ICAI), for the purpose of determining the cost of purchase is not cogent as the reference to cost of purchase in this is not in the context of arm's length price in transfer pricing. 11.9 Assessee's reliance on the decision of the ITAT in Sony India (P) Ltd., vs. DCIT (Supra) is not applicable on the facts of the present case. The portion of this decision referred by the assessee's counsel was in the context o....
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....flected in the books and accounts of the assessee. In our considered opinion, this factual aspect needs verification. Hence, we remit this issue regarding verification of netting off of rebate from cost of purchase to the file of Assessing Officer. Needless to add that the assessee should be given adequate opportunity of being heard. 13. Ground nos. 3 to 3.4 On this issue, the Assessing Officer proposed that why not 20% disallowance be made out of machinery repair and maintenance due to high machinery repair expense of Rs. 4.985 crores. Assessee submitted that the plant and machinery was very old and requires regular repair and maintenance. Therefore, the repair and maintenance expenses are higher this year. Assessing Officer found that this reply of the assessee was very general. He observed that assessee has not made any specific reasons for steep increase in the repair and maintenance of the expenses while the sales remained almost same. He further observed that it was found in earlier assessment years 2003-04 & 2004-05, that many items shown as issues from companies owned stores under the head repair included various items of capital nature and therefore, part of the repa....
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....for plant and machinery. It may be noted that Revenue has not filed an appeal to the High Court against order passed by the Tribunal for assessment year 2003-04. Without prejudice to the aforesaid, the assessing officer did not allow depreciation on the aforesaid amount ofRs.99,69,422 held to be capital expenditure." 14.1 Ld. Departmental Representative relied upon the order of the TPO and DRP. 14.2 We find that on this issue Assessing Officer has made an adhoc disallowance of 20% of the expenditure incurred on machinery repair and maintenance on the premise that the same is capital expenditure. Assessing Officer has not identified as to which items in his opinion are in capital expenditure. In this regard, we also note that such adhoc disallowance were also made by the Assessing Officer in the preceding years in the case of the assessee. But the Delhi Tribunal in assessee's own case for assessment year 2003-04 and 2004-05 upheld the order of the Ld. Commissioner of Income Tax (A) deleting the similar disallowance of expenditure out of repair and maintenance expenses for plant and machinery. We also note that Revenue has not filed any appeal before the High ....
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....er, disallowed the provision for warranty of Rs. 18,70,000 holding that the said liability as an unascertained, contingent liability. Provision for estimated expenditure to be incurred on account of warranty obligation in respect of sales made in the relevant previous year is to be accounted as expenditure in the year of sale, in order to match cost with revenue. The provision for warranty is necessarily required to be made by companies which are required to follow mercantile system of accounting. The Courts have consistently held the view that liability for provision for warranty for replacement on account of manufacturing defects arises at the time of sale and is to be allowed as deduction in that year on the basis of rational/ scientific estimate, notwithstanding that the exact amount of liability is ascertained at a later date. Reliance is placed in this regard on the recent decision of Supreme Court in the case of Rotork Controls India Ltd. vs. CIT : 314 ITR 62, wherein, the Supreme Court laid down three conditions for allowability of provision for warranty (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outf....
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....at the said liability was an uncertain contingent liability. We agree with the assessee's contention that provision for estimated expenditure to be incurred for warranty obligation in respect of sales made in the relevant previous years is to be accounted as expenditure in the year of sale, in order to match the cost with revenue. The provision for warranty is necessarily required to be made by the companies which are required to follow mercantile system of accounting. In this regard, we further find that Courts have consistently held the view that liability for provision for warranty for replacement on account of manufacturing defects arises at the time of sale and is to be allowed as deduction in that year on the basis of rational /scientific estimate, notwithstanding that the exact amount of liability is ascertained at a later date. We further find that action of the assessee in creating provision for warranty is also in consonance with the decision of the Hon'ble Apex Court in the case of Rotork Controls India Ltd. vs. C.I.T. 314 ITR 62. Similarly, we find that relying on the above decision in the case of Rotork Controls the Hon'ble High court in the case of C.I.T. vs. Whirlpoo....