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2018 (3) TMI 1641 - AT - Income TaxTPA - ALP determination - benefit of margin of 5 % on the Alp determined - Held that - AO has determined the ALP of sale Price of 3225 Tractors to AE by comparing the margin of the Tractors sold to AE with Tractors sold to NON AE adopting CUP using Internal Comparables. AO has compared the margin of the Sale of All tractors to AE with margin of sale of Tractors to Non AE which are various transactions of the sale of tractors to AE and which is not one price but multiple prices of sale of tractors therefore assessee deserves to be allowed the benefit of 5 % range and therefore we reverse the finding of the Lower Authorities and direct AO to grant benefit of margin of 5 % on the Alp determined by the ld TPO/AO and recompute the adjustment accordingly. In the result Ground No 1 of the appeal is allowed accordingly. Disallowance of prior period expenses - Held that - Merely because expenditure has been debited in the profit and loss account during the year neither it becomes the expenditure pertaining to this year more it becomes an expenditure pertaining to the prior years. It is the duty of the assessee to show that this expenditure has crystallized during the year and therefore they are incurred during the year. As the adequate details have not been produced before the Ld. assessing officer as well as before the Ld. CIT (A) we set aside the issue of the disallowance of commission paid by the assessee disallowed by the lower authorities holding that these are prior period expenditure. With respect to the sales incentive departmental representative could not controvert that how the issue with respect to the disallowance of 7.75 crores of sales incentive is not now squarely covered in favour of the assessee. No other judicial precedent was submitted before us. In view of this we reverse the finding of the lower authorities with respect to the disallowance of sales incentive of 7.75 crores indirect the Ld. assessing officer to delete the above disallowance as the expenditure is not a prior period expenditure but the expenditure pertaining to current year the assessee has incurred expenditure during the year based on crystallization. With respect to the other disallowance confirmed by the Ld. CIT(A) the basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallizing the expenditure is not in existence in respect of which such income or expenses relates the mercantile system does not call for an adjustment in the books of account on estimate basis. It is actually known income or expenses; right to receive or liability to pay which has come to be crystallized is to be taken into account under mercantile system of maintaining books of account. An estimated income or liability which is yet to be crystallized can only be adjusted as contingency item but not as an accrued income or liability of that year. Therefore with respect to other expenditure along with the sales commission other than sales incentives expenses we set aside the issue before the ld AO with a direction to assessee to submit the requisite details that the expenses have crystallized during the year. - Decided partly in favour of assessee
Issues Involved:
1. Addition of ?27,328,840 as difference in arm’s length price (ALP) for sale of tractors to associated enterprises (AEs). 2. Disallowance of ?102,583,794 on account of prior period expenses. Detailed Analysis: 1. Addition of ?27,328,840 as Difference in Arm’s Length Price (ALP): Facts and Arguments: - The assessee, a manufacturer of tractors, contested an addition of ?27,328,840 made by the Transfer Pricing Officer (TPO) and upheld by the CIT (A). The addition was based on the difference in ALP for tractors sold to AEs in Poland and USA. - The assessee argued that the ALP determined fell within the safe harbour range of +/- 5% of the ALP determined by the TPO. The TPO used internal comparables and arrived at an arithmetic mean margin per tractor for exports to unrelated parties, which was higher than the margin for AEs. - The assessee claimed that the TPO should have allowed the benefit of the 5% safe harbour range under the proviso to section 92C(2) of the Act. Tribunal’s Findings: - The Tribunal observed that the TPO compared the average per unit tractor margin for AEs (?64,822) with non-AEs (?76,526) and calculated a difference of ?11,704 per tractor. This difference was multiplied by the number of tractors sold to AEs (2335), resulting in an adjustment of ?27,328,840. - The Tribunal noted that the adjustment of ?27,328,840 was 3.76% of the ALP declared, which falls within the tolerance margin of +/- 5% as per the second proviso to section 92C(2). - The Tribunal held that since the TPO used multiple transactions for comparison, the benefit of the 5% range should be allowed. The Tribunal reversed the CIT (A)'s finding and directed the AO to grant the 5% margin benefit and recompute the adjustment accordingly. Conclusion: - The Tribunal allowed the assessee's appeal on this ground, directing the AO to grant the benefit of the 5% safe harbour margin and adjust the ALP accordingly. 2. Disallowance of ?102,583,794 on Account of Prior Period Expenses: Facts and Arguments: - The assessee contested the disallowance of ?102,583,794 on account of prior period expenses, of which the CIT (A) allowed relief of only ?1,312,018. - The assessee argued that the expenses accrued in the relevant assessment year due to negotiations, disputes, and final sanction for payment, and were accounted for as per consistent accounting practice. - The major disallowance confirmed by the CIT (A) was for sales incentive to dealers (?77.5 million) and commission paid for the previous period (?13.396 million). Tribunal’s Findings: - The Tribunal noted that the CIT (A) confirmed the disallowance of ?13,396,000 for commission paid, as the assessee failed to produce sufficient evidence to prove that the expenses crystallized during the year. - The Tribunal set aside this issue, directing the AO to re-examine the details and verify if the expenses crystallized during the year. - For the sales incentive of ?77.5 million, the Tribunal referred to the Delhi High Court's decision in CIT vs. Shriram Pistons and Rings Ltd., which held that such expenses crystallize when the sales performance is known, and thus, should be allowed in the year they are determined. - The Tribunal reversed the CIT (A)'s finding and directed the AO to delete the disallowance of ?77.5 million for sales incentive, as it pertained to the current year. Conclusion: - The Tribunal partly allowed the assessee's appeal on this ground, directing the AO to re-verify the commission expenses and delete the disallowance for sales incentive. Final Order: - The appeal of the assessee was partly allowed. - The Tribunal directed the AO to grant the benefit of the 5% safe harbour margin for the ALP adjustment and re-verify the prior period expenses, specifically the commission expenses, while deleting the disallowance for sales incentive.
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