TaxTMI 
TaxTMI 
2022 (11) TMI 363
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....s; (iv) Disallowance of stock valuation loss; (v) Disallowance of expenditure on corporate social responsibility u/s 115JB of the Act by treating the same as apportion of profits (vi) Disallowance of royalty expenses by holding that the assessee had no liability to pay such royalty; (vii) Disallowance of provision for warrantee; (viii) Non-grant of deduction u/s 80G of the Act; (ix) Non-allowance of amount paid as education cess, though this ground has not been pressed. Therefore, the same is dismissed as not pressed. 3. The above concise grounds shall take care of grounds of appeal from Sl. No. 40 till 63 of the appeal memo. Grounds raised vide Ground Nos. 1 to 39 are related to the outcome of Ground Nos. 40 to 40.6 in respect of transfer pricing adjustment of transaction of payment of royalty. 4. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. 5. Briefly stated, the facts of the case are that the assesse....
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....rchase of Solid-State Storage TNMM OP/OR 1,210,982,320 xix. Export of Defective Goods TNMM OP/OR 25,890,105 XX. Purchase of Finished Goods TNMM OP/OR 4,464,987,701 xxi. Receipt of Repair Services TNMM OP/OR 9,150,299 8. The assessee prepared its segmental accounts in two segments, i.e., consumer electronics and advisory segments as under: Consumer Electronics Advisory Operating Revenue 80,738,365,545 21,276,403 Operating Cost 78,498,772,084 18,501,220 Operating Profit 2,239,593,461 2,775,183 OP/PR 2.77% OP/OC 15.00% 9. In order to bench mark international transaction in the nature of import of finished goods and other aggregated transactions, TNMM was considered as the most appropriate method and the ratio of operating profit to operating sales was considered as the PLI. 10. During the course of TP assessment proceedings, it was noticed that the assessee has paid royalty amounting to Rs. 146,989,634/-. In relation to the transaction, a show cause notice was issued to the assessee by which the assessee was asked to explain the following: ....
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....Whether the margin of the taxpayer is lower even after paying amounts towards royalty for the technology transferred by the AE. (9) Copies of agreements based on which the taxpayer paid the royalty. (10) The development or usage of the intangible property and the factors affecting the royalty rate. The rate at which the company has paid royalty to the AE vis-a-vis independent parties and the method of computation of such royalty that are paid / payable by the taxpayer to the AE(s). (11) The going industry rate of royalty for similar intangible / intellectual property right (12) Whether royalty is paid by any of the concern or subsidiary of the AE / Group anywhere in the world for the use of such similar intangible. If yes, the rate or rates at which it is paid. Whether royalty is paid by any independent concern or entity in any other country through which AE/Group carries on similar business as that of you. If yes, the rate or rates at which it is paid. (13) Discounted cash flow analysis or any cost-benefit analysis, if any, carried out by the taxpayer." 11. In its reply, the assessee submitted that there are certain product categorie....
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....ot provide any licensing of technology which would be governed by separate agreements which would be specific to the facts and circumstances of each case. 19. Referring to the decision of the Hon'ble High Court of Delhi in the case of Cushman and Wakefield [India] [P] Ltd TS-150-High Court- 2014[DEL]-TP, the ld. counsel for the assessee stated that the TPO has not respected commercial expediency of royalty payment and drawing our attention to the decision of the Hon'ble High Court [supra], the ld. counsel for the assessee stated that the authority of the TPO is to conduct a TP analysis to determine ALP and not to determine whether there is a service/transaction or not from which the assessee benefits. 20. The ld. counsel for the assessee vehemently stated that Sony Corp has invested significant amount in manufacturing intangibles for which it should be remunerated and the assessee receives license to use these valuable intangible properties during the course of its operations in India at a fixed royalty rate and in an uncontrolled transaction, Sony Corp would not allow a third party to use its intangible properties created through a large amount of investment without ....
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....o ARTICLE V hereof, shall be made by SID or the SUBCONTRACTOR without the prior written approval of SONY of such alteration or modification. SID shall cause the SUBCONTRACTOR to, strictly comply with the restriction set forth above in this Paragraph (3). (4) SONY acknowledges and agrees that SID may have SONY SUBSIDIARIES manufacture and may, by itself or through the SUBCONTRACTOR, purchase from SONY SUBSIDIARIES, the COMPONENTS necessary for the manufacture of the LICENSED PRODUCTS provided that (i) SID shall, jointly and severally, guarantee that SONY SUBSIDIARIES strictly complies with the terms and conditions of this Agreement and any other agreement entered into between SONY and SID regarding the subject matter, (ii) SID shall indemnify and hold SONY harmless from any and all losses or damages suffered or incurred by SONY as a result of breach by SONY SUBSIDIARIES of the above mentioned terms and conditions, (iii) SID shall in no way be relieved of any of its obligations under this Agreement and (iv) nothing contained herein shall be construed as a transfer or assignment of this Agreement by SID to SONY SUBSIDIARIES. SID shall sell the COMPONENTS manufactured by and p....
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....d remitted to a bank account designated by SONY, without any deduction of taxes or charges of any kind, which taxes or charges, if any, are assumed by SID as a part of the royalty. Conversion from the local currency to United States Dollars shall be made at the exchange rate applied by the remittance bank on the dale of the remittance. If, at any time during the TERM any competent government of any country shall require that any income tax be withheld by SID and remitted directly to such government on behalf of SONY, SID shall be and is hereby authorized to do so. SID shall promptly transmit to SONY tax receipts issued by the competent tax authorities of such country in respect of income taxes so withheld so as to enable SONY to support a claim for credit against income tax payable by SONY in Japan." 24. A perusal of the above relevant clauses of the agreement shows that MBIL and CTTL are manufacturing sub-contractors and license has been given to the assessee by Sony Corp. It is not a case of the Revenue that MBIL and CTTL have also paid royalty to Sony Corp. Therefore, we fail to understand how MBIL and CTTL can be considered as manufacturer by TPO/DRP for the purposes of roya....
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....agement consultancy; It is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in ITA 475/2012 Page 26 terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in su....
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.... of Advisory Services. 32. Facts relating to this issue are that during the course of TP proceedings, the TPO found that the assessee had provided advisory services to its AE, on which it was earning a mark-up of 15%. This international transaction comprises of : • Providing market information to new entrants in India market and on the potential customers for ADMS products in India; • Providing information on customer preferences; • Providing Information on the credit standing and financial background of the potential product users; • Providing information on demand and supply drivers in the industry; • Introducing ADMS products to potential users in India based on the results of market surveys/studies undertaken • Customer liaison support including facilitating feedback from product users regarding quality and other related matters. 33. For benchmarking the said transaction, the assessee chose TNMM as the most appropriate method with average margin of the comparables in a range of 9.44% to 13.72% and the transaction was held to be at arm's length. 34. The comparables selected by the assessee....
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....the objections raised by the assessee by a detailed and speaking order after affording reasonable and adequate opportunity of being heard to the assessee. Accordingly, Ground Nos. 41 and 42 with all its subgrounds are allowed for statistical purposes. 39. Third issue relates to the TP adjustment in respect of outstanding receivables. 40. Briefly stated, the facts of the case are that the assessee strongly contended that all receivables and payables being closely linked to respective main transactions, have been bench marked using combined transaction approach and working capital adjustment for which the assessee filed invoice-wise details for export of slow moving goods including amount of invoice, date of invoice and date of payment of invoice. 41. However, the TPO considered the receivables pertaining to international transaction of export of slow-moving goods outstanding for more than 30 days as separate international transaction of unsecured loan extended to AE. 42. The TPO benchmarked this alleged international transaction on a stand - alone basis using PLR as CUP. The assessee contended for application of LIBOR rate as appropriate rate to bench mark transaction bu....
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....goods were with the assessee only. Till the goods are in the possession of the assessee, there cannot be any losses on account of valuation. 52. The Assessing Officer also dismissed the reliance upon the Accounting Standard - 2 by the assessee stating that the profit and loss, as per Accounting Standard -2, are required to be calibrated with the provision of the Act. 53. The Assessing Officer further observed that valuation of loss is actually in the nature of notional losses because the loss is not actually incurred. 54. Before us, the ld. counsel for the assessee reiterated what has been stated before the Assessing Officer. 55. The ld. DR placed strong reliance on the findings of the Assessing Officer. 56. We have given thoughtful consideration to the orders of the authorities below. At the very outset, we have to state that the observations/comments by the Assessing Officer on application of Accounting Standard - 2 is without any merits and, in fact, uncalled for. Secondly, it is an undisputed fact that the assessee has been consistently following the same method of valuation of closing stock which was cost or net realizable value, whichever is lower. 57. The H....
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.... or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the Assessing Officer stating that the assessee has not complied with the accounting standards. 15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under section 37(1) of the 1961 Act. 16. In the light of what is stated hereinabove, it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant accounting standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of accounting. It is well-established, that, on general principles of commercial accounting, in the P&L account, the values of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value,....
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....der: "10. Upon careful consideration, we note section 115JB of the Act provides following adjustment to book profit:- "115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent: Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words "eighteen and one-half per cent" occurring at both the places, the words "fifteen per cent" had been substituted. (2) Every assessee,-- (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepa....
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....unt by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (fa) the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or (fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,-- (A) the capital gains arising on transactions in securities; or (B) the interest, 52[dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share of a ....
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....ted to the statement of profit and loss; or (iia) the amount of depreciation debited to the statement of profit and loss (excluding the depreciation on account of revaluation of assets); or (iib) the amount withdrawn from revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or (iic) the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the statement of profit and loss; or (iid) the amount of income accruing or arising to an assessee, being a foreign company, from,-- (A) the capital gains arising on transactions in securities; or (B) the interest, 53[dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if such income is credited to the statement of profit and loss and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at....
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.... of a company other than the company referred to in clause (iih). Explanation.--For the purposes of this clause,-- (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or (iv) to (vi) [***] (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.--For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of deferred tax, if any such amount is credited to the statement of profit and loss." 11. In our considered opinion, none ....
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....2 35,63,44,000 - 21,10,19,753 FY 2011-12 67,55,54,46,980 21,10,19,753 71,86,87,000 61,15,41,000 - 31,81,65,585 FY 2012-13 82,58,65,19,196 31,81,65,585 94,07,69,817 82,47,13,833 - 43,42,21,569 FY 2013-14 1,00,16,42,25,151 43,42,21,569 3,05,99,84,007 2,05,20,38,088 - 1,44,21,67,488 FY 2014-15 1,10,10,30,08,336 1,44,21,67,488 2,47,41,55,169 2,56,83,83,121 - 1,34,79,39,537 FY 2015-16 80,73,33,57,459 1,34,79,39,537 1,93,41,11,353 2,31,42,46,202 - 96,78,04,688 67. The Assessing Officer observed that every year the assessee has net surplus in provision for warrantee account. Over a period of time of seven years, the assessee has a surplus of 96.78 crores in the provision account. The Assessing Officer was of the firm belief that the provision has been claimed as expenditure but remained unutilized. 68. The assessee was asked to show cause as to why addition of provision for warranty in the immediately preceding year should not be persisted this year. 69. The assessee relied upon the decision of the Hon'ble Delhi High Court in its own case wherein the Hon'ble H....
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.... there has been actual expenditure of Rs. 2,31,42,46,202 on account of warranty for this year itself and therefore, a disallowance of Rs. 52.12 crores is unreasonable. In that regard, it is stated that the Assessee already has a balance of Rs. 134.79 crores in provision account against which the excess amount can be adjusted. If the rate of 1.75% is adopted for subsequent years also, in that case, the reserve will be used and the same will meet the requirement of write back in subsequent years. 9.23 The excess provision to the extent of Rs. 52.12 crores takes the character of contingent liabilities and therefore, it is proposed to be added to the book profit also. 9.24 The amount of Rs.52,12,77,597/- is proposed to be added to the total income of the assessee company. The AO is convinced that the assessee has furnished inaccurate particulars of income, therefore penalty proceedings u/s 271(1 )(c) is proposed to be initiated separately. 73. Strong objections were raised before the DRP. Before the DRP, once again attention was drawn to the decision of the Hon'ble Delhi High Court in the assessee's own case but the objections of the assessee did not find any f....
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....is capable of being construed in definite terms which has arisen in the accounting year. May be its actual quantification and discharge is deferred to a future date. Once an assesee is maintaining his accounts on the mercantile system, a liability accrued, though to be discharged at a future date would be a proper deduction while working out the profits and gains of lfis business, regard being had to be accepted principles of commercial practice and accountancy." (p. 343) 3. In the instant case also, the assessee has on the basis of the past experience and the extent of claims made against it, set apart different amounts for different assessment years. It is not the case of the revenue that the amounts set apart were unreasonably disproportionate to the amounts which were claimed by the customers on the basis of the warranties in the past. In that view, the Tribunal was justified in holding that the amounts set apart by the assessee was an allowable deduction. No substantial question of law arises for our consideration in this appeal, which fails and is hereby dismissed." 75. Though the Assessing Officer has tried to distinguish the facts but, in our considered opinion,....