AI Drafter 
TaxTMI 
TaxTMI 
2022 (3) TMI 1455
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.... law and made in violation of the principles of equity and natural justice and are contrary to the facts and circumstances of the present case. 2. Transfer pricing adjustment in the Manufacturing segment of INR 10,19177,372 2.1. The Hon'ble DRP and learned AO / TPO have erred in law and on facts in making transfer pricing ("TP") adjustment of INR 10,19,77,372 to the returned loss of the Appellant and in holding that the international transactions undertaken by the Appellant with its associated enterprises ("AEs") in the manufacturing segment were not at arm's length. 2.2. Rejection of internal comparable uncontrolled price selected as the most appropriate method by the Appellant 2.2.1. The Hon'ble DRP and learned AO / TPO have erred in law by rejecting the application of Internal Comparable Uncontrolled Price ("CUP") method selected as the most appropriate method ("MAM") by the Appellant for benchmarking the international transaction of import of raw materials in relation to manufacturing segment. 2.2.2. The Hon'ble DRP and learned AO / TPO have erred in upholding the learned TPO's stand that average of the comparable uncontrolled transa....
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....ore than one year and is accepted by the Revenue authorities, it should not be arbitrarily rejected. 2.3. The Hon'ble DRP and learned AO / TPO have erred in law and on facts by adopting the TNMM as the MAM for benchmarking the international transaction of import of raw materials in the manufacturing segment. 2.4. Fresh comparability analysis undertaken by the learned TPO 2.4.1. The Hon'ble DRP and learned AO / TPO have erred in law by conducting a fresh search for comparable companies and by rejecting the benchmarking process carried out by the Appellant as per the provisions of the Act, without giving adequate reasons for the rejection. 2.4.2. The Hon'ble DRP and learned AO / TPO have erred in law in adopting the following filters for conducting TP analysis, without appreciating the TP documentation prepared by the Appellant: * Rejection of companies having different financial year ending (other than March 31, 2013) or data of the company does not fall within the 12 month-period of April 1, 2012 to March 31, 2013. 2.4.3. The Hon'ble DRP has erred in law and on facts in not providing detailed reasons for rejecting the contention....
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....n law and on facts, in making several observations and findings which are based on incorrect interpretation of law and contrary to facts of the case. 2.7.3. The learned AO / TPO has erred by not carrying out the determination of arm's length price as required under section 92C of the Act read with rule 10D of the Rules. 3. TP adjustment in relation to Advertising, Marketing and Promotion expenditure of INR 82,05,25,509 3.1 AMP expenditure not an international transaction 3.1.1 The Hon'ble DRP and learned AO / TPO have erred in law and on facts by alleging that the unilateral Advertising, Marketing and Promotion ("AMP") expenditure, being payments made to third parties, is an "international transaction" as per the provisions of section 92B of the Act, without appreciating that they had not incurred any expenditure on the directions of the AE. 3.1.2 The Hon'ble DRP and learned AO / TPO have erred in law and on facts by taking suo-moto cognizance of alleged international transaction in relation to AMP expenditure, alleging that the Appellant is building marketing intangible for its AE. 3.1.3 The Hon'ble DRP and learned AO / TPO hav....
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....d by the Appellant for the purpose of its business cannot be classified as a deemed international transaction under section 92B(2) of the Act. 3.1.10 The Hon'ble DRP and learned AO / TPO have failed to appreciate that the Appellant has been uninterruptedly using the said brand for the last several years and till date, thus, all benefits enured to the Appellant, for which the Appellant has not even been paying any royalty to its AE. Consequently, for all purposes the Appellant is the sole beneficiary of all the benefits of AMP expenditure incurred during financial year ending March 31, 2013. 3.1.11 The Hon'ble DRP and learned AO / TPO have erred in law and on facts, by holding that the Appellant by incurring excessive AMP expenditure has resulted in creation of marketing intangible in favor of the AE, for which it should be compensated by the AE. 3.1.12 The Hon'ble DRP and learned AO / TPO have erred in law and on facts by disregarding judicial pronouncements in undertaking TP adjustments in relation to AMP. 3.1.13 The Hon'ble DRP and learned AO / TPO have evaluated the reasonableness of such expenses, which should not be judged only on the subjec....
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....arned TPO, an additional revenue (AMP expenditure incurred plus a mark-up as determined by the learned TPO) is imputed to the respective revenues of comparable companies on account of the alleged brand building activity the net margin earned by Appellant will still be within the tolerance band of the adjusted net margin of the comparable companies. 3.2.7 The Hon'ble DRP has erred in law in not considering the detailed submissions of the Appellant that even after performing an AMP expense intensity adjustment to the comparable companies, the adjusted net margin earned from the trading activity by the Appellant is at arm's length. The AMP expense intensity adjustment was affirmed by the Delhi Bench of Hon'ble ITAT in case of Luxottica India Eyewear Pvt Ltd Vs. ACIT1 wherein the AMP intensity adjustment is performed on the profit levels of comparable companies so as to bring them to the level of the Appellant after factoring in the differences in the intensities of AMP expenditure of the comparable companies vis-à-vis the AMP expenditure incurred by The Appellant. 3.2.8 The Hon'ble DRP and learned AO / TPO have erred in law and on facts by characterizing the i....
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.... in determining the mark-up for the alleged international transaction of brand promotion services at 7.59 percent by selecting companies which are not comparable to the Appellant due to reasons including functional dissimilarity. Specifically, the following companies considered by the learned TPO are functionally dissimilar: * Scarecrow Communications Limited; * Asian Business Exhibition & Conference Limited; * Compare Infobase Private Limited; * Percept Advertising Limited; and * Franchise India Brands Limited. 3.2.15 The Hon'ble DRP and learned AO / TPO have erred in law and on facts by not granting the benefit of quantitative adjustments while computing the TP adjustment for the alleged excessive AMP expenditure incurred by the Appellant. 3.2.16 The Hon'ble DRP and learned AO / TPO have erred in not granting appropriate favourable economic adjustments (including the working capital adjustment) when assessing the arm's length nature of alleged international transaction of the Appellant. 3.2.17 The Hon'ble DRP and learned AO / TPO have erred in law and on facts, in making several observations and findings whic....
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.... 6. Additions to book profits under section 115JB of the Act 6.1 Addition of provision for warranty to the book profits 6.1.1 The Honorable DRP and the learned AO have erred in adding back the warranty provision created during the relevant AY amounting to INR 13,40,69,800 to the book profit of the Appellant. 6.1.2 The Honorable DRP and the learned AO have erred in law by not following the order of the Honorable ITAT in the Appellant's own case for the AY 2010-11 and AY 2011-12, wherein it was held that the provision for warranty has been created by the Appellant on a scientific basis and that the same should not be treated as an unascertained liability. Therefore, provision for warranty should not be added back while re-computing book profits under section 115JB of the Act. 6.1.3 The Honorable DRP and the learned AO have erred in law and on facts in holding that the warranty provision of INR 13,40,69,800 is an unascertained liability and therefore, not appreciating that the warranty provision is created on a scientific basis after considering technical estimates which is consistently followed by the Appellant year on year. 6.2 Ad....
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....ssee. On receipt of statutory notices, authorized representative of assessee filed requisite details as called for. 2.1 The Ld.AO observed that assessee entered into international transactions with its AE exceeding Rs. 15 crores and accordingly reference u/s. 92CA was made to the transfer pricing officer. Upon receipt, of reference, the Ld.TPO called upon assessee to file the economic details of international transactions undertaken by assessee in Form 3CEB. 2.2 The Ld.TPO observed that During the AY 2013-2014, the assessee imported certain parts and components from its Associated enterprises ("AEs") for purpose of manufacturing of Personal Computers (PCs). 2.3 The Ld.TPO observed that the assessee also imported parts and components from third parties. The assessee chose Comparable Uncontrolled Price (CUP) as the Most Appropriate Method (MAM) for determining ALP. Assessee compared the price paid for import of parts and components from unrelated persons with the price paid for import of parts and components to the AE. In its Transfer Pricing Analysis, the assessee considered itself as assuming most of the risks including market risk, inventory risk, credit and collection....
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....assed the draft assessment order by making following addition over and above the proposed T.P addition:- 3. The assessee filed objections before the DRP. The DRP agreed with the contentions of the Ld.TPO on both the adjustments proposed. Against the draft assessment order, assessee filed its objections before the DRP. 4. On receipt of the DRP directions, the Ld.AO passed the final assessment order against which the assessee is in appeal before this Tribunal. The Ld.AR submitted that Ground no. 2.1 is general in nature and therefore do not require adjudication. The Ld.AR submitted that Ground nos. 2.2 to 2.6 is on the issue of rejection of internal CUP selected by assessee as most appropriate method by the revenue authorities. The Ld.AR submitted that assessee during the year under consideration the assessee imported certain parts and components from its Associated enterprises ("AEs") for purpose of manufacturing of Personal Computers (PCs). The transaction of import of parts and components was an international transaction and therefore income from such international transaction was to be determined having regard to Arm's Length Price (ALP) as laid down in Sect....
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....ons; b) Weighted average rate is not an uncontrolled transaction that can be compared with the purchases made from AEs / Non-AEs since the level of obsolesce in the computer hardware industry is very high; c) Industry average billing rate cannot be considered in this method by relying on the decision of the coordinate bench of this Tribunal in the case of Aztec Software & Technology Services vs ACIT; and d) There is no publicly available information on prices charged in independent transactions of similar or identical nature, so external CUP cannot be applied. The Ld.TPO thus applied the TNMM as the MAM and determined ALP which resulted in adjustment of Rs.10,19,77,372/- to the Manufacturing Segment. The assessee filed objection before the DRP agains the proposed adjustment. However the DRP upheld the order of Ld.TPO by observing that in CUP method, strict comparability is required and such comparability is not possible in the case of the assessee. The DRP also upheld application of TNMM as MAM and methodology adopted to determine ALP under the TNMM by the TPO. On receipt of the DRP order the Ld.AO passed the final assessment order making the adi....
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.... of the Tribunal rendered in the past will apply to the present AY 2015-16 also. 11. We are therefore the view that CUP should be adopted as the MAM. We direct the TPO to apply CUP as the MAM and determine ALP after due opportunity of being afforded to the Assessee. Ground II sub-grounds 2 to 6 are allowed. In view of the above conclusions the other sub-grounds 7 to 11 raised in Ground No.II does not require any adjudication." Before us, for year under consideration, both Ld.AR as well as Ld.DR raised identical arguments in support of their respective claims as reproduced hereinabove. As the submissions advanced are on identical facts that has already been considered by this Tribunal, for preceding assessment years as well as assessment year 2015-16, respectfully following the above view, we direct the Ld.TPO to replace the TNMM with CUP as most appropriate method. Accordingly, these grounds raised by assessee stands allowed for statistical purposes. As we have already decided the above grounds, Ground no.2.7 becomes general in nature, that do not require adjudication. Ground no.3 relates to the treatment of AMP expenses pertaining to trading segment as an inte....
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....le companies" 3. Industry average billing rate cannot be considered in this method by relying on the decision of the Bangalore ITAT in the case of Aztec Software & Technology Services vs ACIT Reliance is placed on the case of Aztec Software and Technology Services Vs ACIT by the Ld.TPO, wherein the use of average hourly rate as the CUP was rejected, is misplaced as the facts of the case are very different from that of The Assessee's case. * The case relied upon by learned TPO specifically pertains to a taxpayer in the software services industry which is materially different from the Assessee's business, ie, the hardware segment; * In the Aztec case, the rates were dependent on the expertise and technical level of the person performing the function and measurement of such qualitative service can be subjective. However, in the instant case, the components have distinctive codes by which they are known in the industry and the measurement of the prices is not subjective; * The ruling of the ITAT was based on the fact that the taxpayer had received income from services rendered to its AE. In the present case, the Assessee's transactions pertain to expenses that have be....
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....nd loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible." (Emphasis supplied) Hon'ble High Court also held that: "where the learned AO/TPO accepts comparables as a bundled transaction, AMP expenditure cannot be treated as a separate international transaction. The relevant extract of the ruling is as follows: "...(v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performe....
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...., OP/OR of 1.49% and profit on Gross sales is at 11.27%. The taxpayer's margin is at the net level in the trading segment is 2.32% which more than the TPO's Comparables margin. Hence, no adverse inference is drawn with respect to the Arm's length Price of the Distribution segment. Under such circumstances, we do not deem it necessary to remand this issue back to the Ld.AO/TPO. Respectfully following the above we uphod CPM to be the MAM in computing the ALP of the trading segment. Further, based on the categorical observation by the Ld.TPO regarding the trading segment to be at arm's length, we direct the Ld.AO/TPO to delete the adjustment proposed, in respect of the AMP expenses as it cannot be treated as international transactions in the present facts of the case. Accordingly, this Ground no.3.1 to 3.2.12 raised by assessee stands allowed. As we have decided on the above grounds in favor of assessee, the remaining sub grounds become infructuous. Ground NO.4 DISALLOWANCE OF PROVISION FOR WARRANTY During the assessment proceedings, the Ld.AO observed that assessee created provision of warranty. The assessee was called upon by the Ld.AO to explain as to ....
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.... dated 06.02.2021, has dealt with identical issue where in the Hon'ble Court held against the revenue and in favour of the assessee. The relevant extract of the orders passed by the Hon'ble Court is as under: "The Tribunal has rightly relied on the decision rendered by the Supreme Court in ROTORK CONTROLS INDIA PVT.LTD. (supra). Similar view has been taken by a division bench of this court in IBM LTD. Supra. Therefore, the first and second substantial questions of law are answered against the revenue and in favour of the assessee." It also noted that coordinate bench of this Tribunal in assessee's own case for assessment years 2006-07, AY 2007-08, AY 201011 and AY 2011-12(supra) upheld that provision for warranty has been created on a scientific basis and hence allowable as expenditure under section 37 under the Act. The relevant extract of the orders passed by coordinate bench of this Tribunal in assessee's own case for assessment years 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12, are reproduced as under: AY 2006-07(supra) "16- We are of the opinion that the three conditions set out by the Hon'ble Apex Court in the case of Rotork Controls India (Pvt) Ltd....
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.... data and following scientific method. Therefore, we do not find any reason to interfere with the conclusion reached by the co-ordinate bench. Accordingly, we hold that provision for warranty expenditure is allowable. The coordinate bench of this Tribunal relied on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt.Ltd (supra), while upholding assessee's claim for deduction of provision for warranty as an allowable expenditure. Based on the above consistent view taken by coordinate bench of this Tribunal in assessee's own case for preceding and subsequent assessment years relying of the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt.Ltd (supra), we hold that provision for warranty expenditure is allowable. Accordingly Ground No4 raised by assessee stands allowed. Ground NO.5 DISALLOWANCE OF PROVISION FOR LEAVE ENCASHMENT During the course of the assessment proceedings, the Ld.AO observed the policy of provision for leave encashment followed by the assessee. The assessee was called upon to explain the same. In response, vide its submission dated 1/12/2016, assessee submitted that the as per the leave enca....
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....f accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him : Provided that nothing contained in this section shall apply in relation to any sum ] which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return." The Ld.AR submitted that in light of the conditions stipulated under the section, it can be said that provision for leave encashment would be allowed, if the payment is made on or before filing the return of income. He submitted that the assessee suo mote disallowed the provision for leave encashment not paid on or before filing the return of income. On the contrary, the Ld.DR relied on orders passed by authorities below. We note that coordinate bench of this Tribunal in assessee's own case for AY 2011-12(supra) has held that leave encashment is not a contingent liability, and that, t....
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....6 of the Companies Act. Explanation 1 to said section provides that for the purposes of the said section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by various items specified in Clauses (a) to (i) provided therein. Clause (c) thereof reads as thus: "(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;" In other words, if an amount is specified for provision which is for meeting with the liabilities not ascertained such provision so made shall have to be added back to the book profit of the company. Put it differently, if such provision is made for ascertained liability, no such addition back shall be made. In this context, the Tribunal was called upon to decide whether the assessee having made provision of Rs. 5,10,000/- towards gratuity would be covered under Clause (c) to Explanation 1 to Section 115JB of the Act. The Tribunal relied on the decision of the Bombay High Court in case of CIT v. Echjay Forgings (P.) Ltd. [2001] 251 ITR 15/116 Taxman 322 and confirmed the view of the CIT(A). ....
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....be measured only by using substantial degree of estimation. Such provision is recognized when an assessee had a present obligation as a result of past events, and it is possible that any outflow of resources will be required to settle the obligation and further a reliable estimate can be made of the amount of obligation. 21. Considering the above judicial pronouncements and the facts on hand, we have no hesitation in upholding the Tribunal's view that though actual payment of gratuity may be made at a later point of time upon periodical release of the employees from service, it is provision having been made on actuarial basis it cannot be stated to be an uncertained liability so as to add it back in terms of Clause (c) to Explanation 1 to Section 115JB. " The Ld.AR drew our attention to the reconciliation of workings with respect to provision for leave encashment placed in the paper book at page 804 in Volume II. We are therefore of the opinion that the issue needs to be verified in the light of the reconciliation placed in the paper book by the Ld.AO having regards to the observation by the coordinate bench of this Tribunal in assessee's own case for AY 2011-12(....