TaxTMI 
TaxTMI 
2012 (12) TMI 1166
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....ciated 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 not reducing the rebate received of Rs. 33,21,586 while computing the cost of goods sold of....
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.... 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. 32,65,88,813, comprising of export of manufactured products of Rs. 21,58,31,755 and export of traded products of Rs. 11,07,57,058. The assessee has purchased finished goods, viz., certain....
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....rice 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 arranging for shipment. Expenses (for example; sales, collection or advertising expenses) not required to conduct inter-company business should not be include. The 5% mark up is to be applied to the sum of all costs and expenses discussed above. The following are specific directives that are to be used wit....
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....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 pricing is to provide a minimum amount of return to the members of global transfer pricing policy. That if a country provides tax incentives or other incentives to compensate its taxpayers on the basis of economic situation in that country, then this benefit is available only to the Indian taxpayers and the same cannot be transferred or ....
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....ing 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:- 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 Effective 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 good....
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....t 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. The export incentive in the form of duty draw back scheme or DEPB credit entitles the exporter refund or credit against duty suffered by him in the cost of purchase either directly or indirectly, in respect of export turnover. Therefore, for the purpose of computing the correct profitability of export transactions, the export incentives received are required to be netted off from the cost of purchase. The profitability from the transaction of export may be presented in two alternative ways ....
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....es 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 Less: Total Cost 46.55 55.39 Total Profit 9.45 0.61 Total Exporter Cost 44.05 52.45 50% Profit to Exporter 4.73 0.31 50/50 Special V -Price 48.78 52.76 The TPO, clearly ignored the fact that the Global Transfer Pricing Policy of the group, Pg. 11 PB-1 provide for reducing the cost of merchandize exported by the export incentive available to TPO order the export entity, i.e. the appellant. (iii) It is a standard practice for exporters of goods to compute their profitability, by factoring in the export incentives received from the Government. It is also the industryOwise practice to determine cost of goods net of export incentive for the purpose of pricing/ profitability of such export. These export incentives could either be netted off from the costs (as in the case of the appellant), or alternatively, added to the income for computing th....
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....nd upheld in appeal by the Ld. Commissioner of Income Tax (A) is not called for. It is directed to be deleted. "[Emphasis supplied} In that case the Hon'ble Tribunal also held that sales / service tax refunds can reasonably be treated as operational income of the taxpayer and can be included in working out its operating profit. The assessing officer would appreciate that the nature of export incentives is akin to that of sales / service tax refunds, since they are also tax benefits given to companies by the Government of India. The relevant extract of the said decision in this regard reads as under: "Observing in Para 21.3 of the impugned order that the following items while calculating the operating margins for comparison and determination of ALP be excluded: Particulars Amount in Rs. ('000) Provisions written back 7,916 Sales Tax/Service Tax refund 431 Notice Pay Recd! Fines & Penalties from staff 437 Membership & Subscription received 35 Other misc. income 12162 ..................... The taxpayer has submitted certain arguments while making similar claim in the general grounds relating to deduction u/s 8OHHC, Reliance in support of such claim has been ....
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....321 at page 329 held that where a fundamental aspect permeating through different years is found as a fact one way or the other and parties have allowed that position to remain, it is not possible to come to a different conclusion in the subsequent year. There has been no change in fact and in law in the appellant's case and following the principle of consistency, as laid in the following decisions, the rebate received by the appellant shall be reduced from the cost of goods sold in the relevant previous year: Radhasoami Satsang vs. CIT: 193 ITR 321 (SC) CITvs. Neo Polypack (P) LId. : 245 ITR 492 (Del. CITvs. A.K.J. Security Printers: 264 ITR 276 (Del.) DIT(E) vs. Apparel Export Promotion Council: 244lTR 734 (Del.) Vesta Investment and Trading Co. (P) Ltd. vs. CIT: 70 ITD 200 (Chd.) NGC Network (India) P Ltd. ITA No. 5307/M/2008 Reliance in this regard is also placed on the recent decision of Pune Bench of Hon'ble Tribunal in the case of Brintons Carpets Asia P. Ltd. vs. DCIT [ITA No. 1296/Pune/10, wherein the Hon'ble Tribunal held, that, the rule of consistency is relevant to income tax matters and the assessing officer cannot ignore the same. There ought....
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....asoning adopted by the TPO has considerable cogency. The export benefits are given to the taxpayers to promote and stimulate the growth of exports of goods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentive was available to the assessee only after trading exports made by the assessee. Global Transfer Pricing policy of the group company mentions cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. In the Global Transfer Pricing Policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. If India provide tax incentive or other incentive to compensate its taxpayers on the basis of the economic situation, then this benefit is available to Indian taxpayers and the same cannot be transferred or traded to other entity which is not....
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.... idle facilities to enable the company to improve recovery of its fixed assembly cost. Moreover, in the present case, we are concerned with computation of cost plus markup which was not the case in the Sony India decision. 11.10 In the background of the aforesaid discussion, we are of the opinion that TPO has rightly held that export incentive amounting to Rs. 7,872,603/- cannot be deducted from cost of goods sold. 12. As regards issue of deduction of rebate /discount received amounting to Rs. 33,21,586/-, the TPO observed that the assessee in this regard has made the claim for the first time. Assessing Officer further observed as under:- (i) This item of rebate does not find a place in the financials accompanying the TP report. (ii) In the details forwarded by the Addl. C.I.T. (Transfer Pricing) Pune there is no reference to any rebate being allowed by M/s GSATL. (iii) The rebate claimed does not seem to appear anywhere in the audited financials of the assessee. (iv) The only conclusion that can be arrived at is that the issue / claim of rebate has been raised to offset the freight cost which has entered the cost base at this stage. For these reasons the claim of rebate ....
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....ved that it was seen from the detail of repair to machinery account that it includes various items of capital nature in this year too. Assessing Officer estimated the items in capital nature at 20% of the machinery repair and maintenance. Therefore, the total amount to be capitalized came to Rs. 99,69,422/- (20% of 4,98,47,109/-). Therefore, the Assessing Officer made the addition of Rs. 99,69,422/- to the income of the assessee. 13.1. Assessee objections in this regard were rejected by the DRP. DRP affirmed the order of the Assessing Officer and also held that the claim of depreciation on this capital expenditure was to be allowed. 14. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted as under:- "that the assessee had incurred expenditure on routine repair and maintenance of plant and machinery aggregating to Rs. 4,98,47,109 which included expenditure on account of consumables, stores and spares, etc., amounting to Rs. 2,14,95,075 issued from stores. The balance expenses were also incurred on annual maintenance services, purchase of consumables and spares, job works, etc., for the purpose of r....
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....ts, we set aside the order of the Assessing Officer and decide the issue in favour of the assessee. 15. Ground nos. 4 to 4.1 On this issue Assessing Officer observed that during the year ended 31.3.2006, the assessee has claimed an amount of Rs. 1,38,70,000/- towards provision for warranty. The assessee was asked to explain as to why the said provision be allowed. Assessee in response relied upon certain case laws and contended that based on principles of accounting it should be allowed. However, Assessing Officer did not find this response acceptable. He held that assessee has not been able to prove the computation mechanism followed by the company for creating such provisions That being contingent in nature the provision for warranty was disallowed and added to the income of the assessee. 16. Assessee submitted its cross objection before the DRP. The DRP affirmed the action of the Assessing Officer in this regard. However, the DRP observed that the claim of the assessee that only Rs. 1870000/- has been charged to profit and loss account. Hence, the disallowance should be restricted to this amount, needs to be verified by the Assessing Officer. Assessing Officer was thus, direc....
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.... of Rotork Controls (supra), the Hon'ble Delhi High Court in the case of CIT vs. Whirlpool of India [242 CTR 245], too, dismissed the grounds of the revenue for disallowing provision for warranty . Reliance is also placed on the following decisions, wherein, provision for warranty on the basis of an estimate has been held to be allowable deduction: CIT vs. Vinitec Corpn. (P.) Ltd.: 278 ITR 337 (Del) CIT vs. Beema Mfrs (P) Ltd: 130 Taxman 400 (Madras) CIT v. Indian Transformers Ltd.: 270 ITR 259 (Ker.) Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd.: 222 ITR 697 Honda Siel Cars India Ltd. for the assessment years 2001-02 and 2002-03 (ITA Nos. 3688,3689/DeI/2005) (Delhi) Wipro GE Medical Systems Ltd. v. DCIT: 81 ITJ 455 (Bang.) Modi Olivetti Ltd. v. DCIT: (ITA NO. 2245/D/99)(Del.) JCIT v. Whirlpool India Ltd. : (ITA No. 1904/D/1999)(Del.) Jaybee Ind v. DCIT: 66 ITD 530 (Asr.) Majestic Auto Ltd. v. lAC: ITA NO.7/Chandi/88 (Chd.) ITO v. Wanson (India) Ltd.: 5 ITD 102 (Pune) Voltas India Ltd. : 64 ITD 232 (Born) DCIT v Samtel Color Ltd in ITA No 3966/D/96 (Del) In the case of the appellant, provision for warranty / obligation incu....
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....precedents, we hold that provision for warranty made by the assessee is allowable. Hence, we set aside the order Assessing Officer on this issue. 18. Ground no. 5 On this issue, it was the claim of the assessee that excise duty of Rs. 1,05,415/- has been paid this year which was a part of total amount of excise duty of Rs. 2,06,646/- disallowed in A.Y. 2005-06, in accordance of the provision of section 43B of the I.T. Act. Therefore, the same should be allowed in this year. Assessing Officer observed that assessee has made similar request before the then Assessing Officer for giving relief u/s. 43B against the payment of excise duty of Rs. 105415/- in this year which was a part of the total amount of excise duty of Rs. 206646/- disallowed in A.Y. 2005-06. The Assessing Officer observed that the then Assessing Officer after proper verification of the assessee's claim has proposed disallowance of a sum of Rs. 38,369/- as the amount paid after the due date, as per the provision of section 43B of the I.T. Act. Assessing Officer held that for want of proper break-up and other details a sum of Rs. 38,369/- was paid as excise duty, after the due date, is again disallowed, as per the pro....