TaxTMI 
TaxTMI 
2021 (2) TMI 609
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....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 7. Without prejudice to the abovementioned grounds that no transfer pricing adjustment ought to be made, the learned AO/learne....
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....er 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 historical trend and is created on a scientific basis and hence is not contingent in nature. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appea....
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....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 margin, it failed to recover the other operational costs at net level and hence reports loss, as compared to the comparable companies, who were early entrants in the specified industry. 9. The DRP observed that assessee has not brought any argument or facts in favour of application of CPM in the instant case when it is a full-fledged manufacturer. The DRP observed that replies and submissions were general ....
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....ew 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: 7.5 Even going by the warranty provision workings, it is seen that for the past three years, the actual utilization of warranty varies from 17% to 43%. Further, the returns under warranty also vary from 0.15% to 0.40% of production. 7.6 Going by all the above, it is inferred that the warranty provisions not been made in a scientific manner as laid out by the ratio supra) of the Apex Court. Therefore, the unused warranty provisions of 94,95,260/- is being dis....
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....argin 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 the MAM should be directed to be carried out. 18. The ld. counsel for the assessee, on the other hand, pointed out that as far as international transaction of trading in heaters is concerned, in assessee's own case, this Tribunal has held that RPM is the MAM for determining the ALP. The decision of ITAT in Dy. CIT v. A.O. Smith India Water Heating (P.) Ltd.[2018] 97 taxmann.com 218 (Bang. - Trib.) was sought to be relied upon by the ld. counsel for the assessee. With regard to the international trans....
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....efore 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 and appropriate data on record in the matter of determination of ALP. 23. In the result, the appeal by the revenue is allowed for statistical purposes." 19. We note that, for assessment year 2011-12, it was the revenue who was aggrieved by the directions of DRP in considering CPM as the most appropriate method for determining ALP of the international transaction under trading segment. For assessment year 2011-12, the Ld.TPO had adopted RPM as against CPM considered by assessee, with same set of comparables as considered by assessee therein. ....