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2012 (12) TMI 1166 - AT - Income TaxComparable selection - Determination of the arm s length price - export incentives received for sales of export of finished goods - reduction of export incentive from goods sold - TPO held that export incentive cannot be deducted from cost of goods sold - Assessee during the relevant previous year inter-alia entered into international transactions of export of finished goods to its associated enterprises comprising of export of manufactured products and export of traded products. The assessee has purchased finished goods viz. certain varieties of tyres from Good Year South Asia Tyres Pvt. Ltd. (GSATL) for export to the associated enterprises (AEs) - appellant follows a similar economic model for pricing its exports be it exports of manufactured goods or traded goods. HELD THAT - We find that the reasoning adopted by the TPO has considerable cogency. The export benefits are given to the taxpayers to promote and stimulate the growth of exports of goods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentive was available to the assessee only after trading exports made by the assessee. Global Transfer Pricing policy of the group company mentions cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. In the Global Transfer Pricing Policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. The assessee who is involved in controlled transaction this approach actually results in transferring benefit from Government granted incentives to AE. Moreover the entities transfer pricing policy cannot override the basic fundamental of transfer pricing analysis. If assessee s method of calculation of cost of goods sold is followed it would tantamount to a claim of benefit which has not yet accrued at the time of sale of goods being treated as a component of cost of goods sold. TPO has rightly observed that export incentives does not form part of the invoice price of goods sold. In such a case it cannot be reduced from the cost of goods sold. We agree with the TPO that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. Hence we are of the opinion that TPO has rightly held that export incentive cannot be deducted from cost of goods sold. Deduction of rebate /discount - We find that as per the agreement assessee is entitled for rebate of 3% on cost of goods purchased for exports to AE as well as to unrelated parties. We find that the above reasoning adopted by the AO in disallowing the deduction is not cogent. That the assessee has not made any such claim initially cannot act as estoppel against the proper and valid claim. We agree with the ld. Counsel of the assessee company that the rebate received is inextricably linked with the cost of purchase. We further note that in subsequent assessment years for AY 2007-08 and 2008-09 the TPO has accepted the contention of the assessee that the rebate received upon purchase of goods is deductible from the value of cost of goods sold. Hence in our considered opinion assessee is entitled for deduction of rebate received upon purchase of goods from the value of goods sold. We further find that the rebate amount was netted off and net amount of purchase cost shown in the profit and loss account. In this regard TPO has contended that the said amount was not reflected in the books and accounts of the assessee. In our considered opinion this factual aspect needs verification. Hence we remit this issue regarding verification of netting off of rebate from cost of purchase to the file of AO. Needless to add that the assessee should be given adequate opportunity of being heard. Disallowance on machinery repair and maintenance - HELD THAT - We find that on this issue AO has made an adhoc disallowance of 20% of the expenditure incurred on machinery repair and maintenance on the premise that the same is capital expenditure. AO has not identified as to which items in his opinion are in capital expenditure. In this regard we also note that such adhoc disallowance were also made by the AO in the preceding years in the case of the assessee. But the Delhi Tribunal in assessee s own case for AY 2003-04 and 2004-05 upheld the order of the Ld. CIT (A) deleting the similar disallowance of expenditure out of repair and maintenance expenses for plant and machinery. We also note that Revenue has not filed any appeal before the High Court of Delhi against the aforesaid order passed by the Tribunal. Hence we set aside the order of the AO and decide the issue in favour of the assessee. Claim towards provision for warranty - AO disallowed provision for warranty by holding that the said liability was an uncertain contingent liability - HELD THAT - We agree with the assessee s contention that provision for estimated expenditure to be incurred for warranty obligation in respect of sales made in the relevant previous years is to be accounted as expenditure in the year of sale in order to match the cost with revenue. The provision for warranty is necessarily required to be made by the companies which are required to follow mercantile system of accounting. In this regard we further find that Courts have consistently held the view that liability for provision for warranty for replacement on account of manufacturing defects arises at the time of sale and is to be allowed as deduction in that year on the basis of rational /scientific estimate notwithstanding that the exact amount of liability is ascertained at a later date. Hence we hold that provision for warranty made by the assessee is allowable. Hence we set aside the order AO on this issue. Claim on excise duty - disallowed in AY 2005-06 - During the present year out of the AY 2005-06 excise duty has been paid during this year. Hence it has been claimed that the same should be allowed in terms of section 43B of the I.T. Act - AO held that for want of proper break-up and other details a sum was paid as excise duty after the due date is again disallowed as per the provisions of section 43B. HELD THAT - We agree with the assessee s counsel contention that AO has not properly dealt with this claim of the assessee. Assessee s claim is that in terms of section 43B the excise duty on closing stock disallowed in the preceding previous year and paid during the relevant previous year should be allowed as deduction. The claim needs factual verification hence we remit this issue to the file of the AO. In the result the appeal filed by the Assessee is partly allowed.
Issues Involved:
1. Adjustment of arm's length price for international transactions. 2. Disallowance of repair and maintenance expenses as capital expenditure. 3. Disallowance of provision for warranty as contingent liability. 4. Deduction for excise duty on closing stock under Section 43B. Detailed Analysis: 1. Adjustment of Arm's Length Price for International Transactions: The primary issue was the adjustment of Rs. 1,13,13,182 due to alleged differences in the arm's length price of international transactions. The assessee argued for the reduction of export incentives and rebates from the cost of goods sold to compute the gross profit margin. The Transfer Pricing Officer (TPO) disagreed, citing that export incentives should not be considered in the cost calculation as per the Global Transfer Pricing Policy. The TPO emphasized that export incentives are meant for Indian taxpayers and cannot be transferred to associated enterprises (AEs). The TPO also referenced OECD guidelines, which do not allow such incentives in determining the cost of goods sold. The Tribunal upheld the TPO's decision, stating that export incentives cannot be deducted from the cost of goods sold. Regarding the rebate/discount of Rs. 33,21,586, the TPO initially disallowed it, stating it was not reflected in the financials. However, the Tribunal found that the rebate was indeed linked to the cost of purchases and should be deducted. This issue was remitted to the Assessing Officer for verification. 2. Disallowance of Repair and Maintenance Expenses as Capital Expenditure: The Assessing Officer disallowed 20% of the repair and maintenance expenses, treating them as capital expenditure without specifying which items were capital in nature. The Tribunal noted that similar disallowances in previous years were deleted by the Tribunal. It held that the Assessing Officer's adhoc disallowance was not justified and decided in favor of the assessee, allowing the repair and maintenance expenses as revenue expenditure. 3. Disallowance of Provision for Warranty as Contingent Liability: The Assessing Officer disallowed the provision for warranty of Rs. 18,70,000, considering it a contingent liability. The Tribunal referred to the Supreme Court's decision in Rotork Controls India Ltd. vs. CIT, which allows such provisions if they are based on a rational and scientific estimate. The Tribunal found that the provision was made on a rational basis and allowed the deduction, setting aside the Assessing Officer's order. 4. Deduction for Excise Duty on Closing Stock under Section 43B: The assessee claimed a deduction for excise duty of Rs. 1,05,415 paid during the year, which was disallowed in the previous year under Section 43B. The Assessing Officer did not properly address this claim. The Tribunal remitted the issue to the Assessing Officer for verification, directing that the deduction should be allowed if the excise duty was indeed paid during the relevant year. Conclusion: The Tribunal partly allowed the appeal, providing relief on certain issues while remitting others for further verification. The key takeaways include the upholding of the TPO's decision on export incentives, the allowance of repair and maintenance expenses as revenue expenditure, the acceptance of the provision for warranty, and the remittance of the excise duty deduction issue for verification.
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