TaxTMI 
TaxTMI 
2021 (2) TMI 609
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.... 2. The learned AU/learned TPO/Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act. 3. The learned AU/learned TPO/Hon'ble DRP erred in disregarding the economic analysis performed by the Appellant in the Transfer Pricing documentation to justify the arm's length nature of the international transaction pertaining to purchase of raw materials. IN The learned AU/learned TPO/Hon'ble DPP erred in not applying Cost Plus Method ("CPM") as the most appropriate method with respect to the manufacturing activity of the Appellant. 5 The learned AO/learned TPO/Hon'ble DRP ought to have appreciated the fact the Appellant was in its startup phase with respect to the manufacturing activity of the Appellant. The learned AU/learned TPO/Hon'ble DRP erred in not appreciating the fact that the losses incurred during the year were due to economic and business reasons such as: i. Market penetration strategies; ii. Price competitiveness; iii. Under-utilization of capacity; and iv.Impact of foreign exchange fluctuation ....
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....ed with an intent to promote sale of Company's products. c. The learned AO/ Hon'ble DRP ought to have appreciated that the above expenses have been incurred for the purpose of business and hence allowable under the provisions of section 37(1)of the Act. 13. Disallowance of warranty provision - Rs. 94,95,260 a. The learned AO/ Hon'ble DRP has erred in disallowing the warranty provision of Rs. 94,95,260 b. The learned AO/ Hon'ble DRP has erred in observing that the Company does not have enough data to carry out a trend analysis in a scientific manner as AY 2012-13 is the fourth year of operation of the Company and third year of utilisation of warranty provisions. c. The learned AO/ Hon'ble DRP has erred in holding that the Company has been creating provisions on an ad-hoc basis ignoring the basis on which the provision was determined. d. The learned AO/ Hon'ble DRP has erred in observing that warranty provision is contingent in nature and hence, not allowable as a business expenditure. e. The learned AO/ Hon'ble DRP ought to have observed that warranty provision is calculated based on historica....
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.... comparables chosen by the assessee: S.NO Company Name Sales OP OP/SA LES 1 Genus Power Infrastructures Ltd. 717.77 86.04 11.99% 2 Incap Ltd. 17.61 0.76 4.32% 3 Salzer Electronics Ltd. 249.12 21.8 8.75% 4 Penguin Electronics Ltd. 86.94 5.92 6.81% 5 Kirloskar Electric Co. Ltd. 949.5 21,31 2.24% AVERAGE 6.82% 5. The Ld.TPO computed assessee's margin to be (-) 18.28% on sales and average margin of comparables at 6.28%, and thus proposed an adjustment at Rs. 21,17,82,872/-by determining in the margin of assessee using PLI as OP/OC. 6. The Ld.AO while passing the draft assessment order further disallowed: * The provision created for sales/advertisement amounting to Rs. 73,37,974/- * Unexplained expenditure on advertisement amounting to Rs. 93,02,790/- * Provision created for warranty amounting to Rs. 94,95,260/- 7. Aggrieved by the additions made by the Ld.AO, assessee filed objections before DRP. 8. Before DRP the assessee submitted that it is in the start-up phase and operates in the capital intensive industry and hence despite having held the gross ma....
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....y way of producing the proper documentary evidence, least by saying that increase in turnover justifies this. The increase in turnover this year over last year, could be due to several factors including the factors pertinent to the previous year, to cite one; that the company had full scale manufacturing for complete 12 months during the year in contrast to the 6 months of manufacturing last year. Thus, we are of the view that the assessee has to discharge the initial onus to establish the genuineness of the transaction, which it failed do so. Both the cited judicial precedents are not helpful to the assessee, as the facts are totally different and in the present case the assessee has completely failed to establish the fact that It had genuinely incurred any such expenses claimed in the Books. In view of the above, we uphold the action of the AO and reject the objection of assessee." 12. In regards to disallowance of warranty provision, the DRP upheld the action of Ld. AO by observing as under: "Having considered the submissions, we have examined para 7 of the TP order this issue was discussed while concluding in para 7.5-7.6 that: 7.....
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....eved by the order of the DRP as aforesaid, the revenue has preferred the present appeal before the Tribunal. 17. We have heard the rival submissions. The ld. DR submitted that the basis on which the DRP deleted the TP adjustment made by the AO was not correct. In this regard, the ld. DR submitted that the requirement of section 92(1) of the Act for determination of ALP in respect of an international transaction has to be followed and merely for the reason that on such determination, the profit margin of the assessee will be exorbitant cannot be the basis to delete the addition made on account of determination of ALP. His submission that if the DRP finds that the MAM is CPM for international transaction for purchase of raw materials and RPM for international transaction for trading in water heaters is appropriate, then the DRP ought to have embarked upon an enquiry as to whether the ALP computed by the assessee in accordance with those methods was correct. It was submitted by him that by default price paid in international transaction cannot be considered as at arm's length. It was therefore submitted by him that determination of MAM and determination of ALP based on th....
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....ns of section 92 mandate determination of ALP. The fact that after carrying out such exercise, the profit margins of the assessee would be abnormal cannot be the basis to accept the price paid in the international transactions as at arm's length. In other words, it is mandatory to determine the ALP in the manner contemplated by the Act and the Rules. In our view, the DRP fell into an error in accepting the price received by the assessee in international transactions as at arm's length without carrying out such an exercise. We therefore feel it proper to set aside the order of DRP and remand to the AO/TPO for fresh consideration the determination of ALP on the basis of MAM as adopted by the assessee in its TP study. 22. The ld. counsel for the assessee submitted before us that the comparables chosen by the assessee in its TP study were also chosen by the TPO, when he adopted TNMM. His prayer was that pursuant to the remand by the Tribunal, the TPO should be directed to restrict himself from choosing any fresh comparables. In our view, the TPO has to carry out the exercise in accordance with the law and no restriction can be placed on his powers to bring any relevant....