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2021 (9) TMI 12 - ITAT BANGALOREDeduction of Provision made towards long service benefit liability - Crystalization and Accrual of expenses - scientific basis for creating a provision - Application of Accounting Standard 15 - AO disallowed the provision stating that such liability has neither crystallized nor accrued during the year and there was no contractual obligation on the assessee and such amount constituted loyalty bonus subject to section 192 at the time of actual payment - HELD THAT:- Taking into account the judicial pronouncements and the AS-15, we hold that if the liability is an known liability and the estimation of liability is reliable, the provision made for the relevant assessment year cannot be stated to be a contingent liability - if the assessee had made a provision on proportionate basis, i.e., taking into account 10% on an year to year basis for gifting the memento on completion of 10 years of service, we could have understood the valuation report is based on some reasonable basis - when the employee leaves the assessee-company prior to completion of ten years, how the provision is reduced on year to year basis, is also not explained. Before us, no explanation was offered as regards how the provision of ₹ 46,60,033 is arrived at. - the assessee has to prove before the A.O. the scientific basis for creating a provision - Ground restored to the files of the A.O. with the above directions. Allowable business expenditure or not - addition u/s. 37 being the expenditure related to construction of school at Bidadi, promotion of Japanese language and construction of basic civil structure for water purification plant at Ramanagaram - HELD THAT:- Majority of the expenses incurred by the assessee is incurred in villages very near to assessee's manufacturing plant. It is the claim of the assessee that the workers and their family has benefitted from the above expenditure. This fact has also accepted by the CIT(A) by allowing as deduction 10% of the total expenditure - Amount expended for promotion of Japanese language will also ultimately benefit the employees of the assessee. Taking the overall view and to put a quietus to the issue, we hold that 30% of the total expenditure would have benefitted the employees of the assessee-company. Restatement of the hedging transaction - Allowable revenue expenditure or not - interest rate fluctuation risk and foreign exchange fluctuation risk - HELD THAT:- This claim of the assessee is not mandated as per the judgment of the Hon'ble Supreme Court relied on by the A.O. as well as the provisions of the Income-tax Act. As rightly pointed out by the CIT(A), the A.O. had in letter and spirit followed the judgment of the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India P. Ltd. [2009 (4) TMI 4 - SUPREME COURT] reiterated in the case of Oil and Natural Gas Corporation Ltd. v. CIT [2010 (3) TMI 81 - SUPREME COURT] and in the case of CIT v. Maruti Udyog Limited [2009 (10) TMI 42 - SUPREME COURT] - underlying reason for availing the foreign loans are for purchase of plant and machinery, which is admittedly is on the capital front and cannot be allowed as a revenue expenditure - Decided against assessee. TP Adjustment - comparable selection - inclusion of Tata Motors Limited and Maruti Suzuki India Limited - deselectio of comparables having RTP in excess of 25% - HELD THAT:- There is nothing on record to suggest how RPT ratio has been calculated for all the comparable companies. RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales. The said position was adopted by the Revenue in the past years. In this regard, the TPOs order in assessee's own case for assessment year 2007-2008 has been placed on record - RPT ratio has been calculated taking both RPT income transactions plus RPT expenses transactions on aggregate basis - It is not clear how RPT ratio has been calculated for Tata Motors Limited vis-à-vis other comparable companies. Therefore, this issue is restored to the files of the A.O. The A.O. is directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata Motors Ltd. and Maruti Suzuki India Limited. Provision Written back - Operating in Nature - assessee had written back provision that was no longer required same was credited to the profit and loss account - While computing the margin, the assessee treated the same as operating in nature and treated the same as non-operating in nature - HELD THAT:- The assessee has reversed the provision which were no longer required. In the year of creation of this provision, the same were treated as operating in nature and reversal of the same should also be treated as operating in nature. This view has been consistently held by the judicial pronouncements relied by the CIT(A). Working capital adjustment - HELD THAT:- The working capital adjustment is an accepted adjustment - we hold that the CIT(A) is justified in directing the AO to grant working capital adjustment. TP adjustment should be restricted to AEs transactions - HELD THAT:- We hold that the CIT(A) has correctly directed the AO/TPO to restrict the TP adjustment to the AEs transaction. Royalty Benchmarking - assessee had adopted TNMM at the entity level in which process royalty payment is considered as closely linked transaction and part of operating cost - TPO rejected the above stand of the assessee and benchmarked the royalty transaction as per the ALP computation of assessment year 2012-2013 - HELD THAT:- We are of the view that once the net profit margin is tested on touchstone of arm's length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length. In taking the above view, we rely on the order of the ITAT in assessee's own case for assessment year 2007-2008 [2015 (3) TMI 304 - ITAT BANGALORE] wherein the Tribunal had held that the royalty payment made by the assessee are at arm's length price - we hold that the CIT(A) was correct in partly allowing the assessee's ground by holding that the TPO has to follow a consistent approach and adopt net sales as denominator for the purpose of comparable royalty in the case of comparables and the assessee.
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