2017 (5) TMI 1678 - AT - Income Tax

Disallowance of provision for warranty expenses - HELD THAT - This issue is covered, in favour of the assessee, by a coordinate bench decision in assessee s own cases for the assessment yea₹ 2000-01, 2001-02, 2002-03, and 2004-05. DR, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon ble jurisdictional High Court has declined to admit the appeal on this issue and the matter has thus attained finality. Thus we uphold the plea of the assessee and direct the AO to delete the impugned disallowance. Disallowance for provision for expenses - HELD THAT - There cannot be any dispute about the genuineness of the provision to this extent, as the related payment has indeed been made, in respect of the expenses of that year, in the subsequent year. We, therefore, deem it and proper to allow the provision to this extent. The alternate plea of the assessee is thus upheld. In any case, learned counsel for the assessee did not have much to say in support of the basic plea either inasmuch as no scientific basis, for quantification of provision, was furnished. Disallowance of prior period expenses - HELD THAT - while dealing with the earlier grounds of appeal, this is a peculiar case in which the accounts are finalized within 10 days of the annual closing, so as to facilitate consolidation of accounts by the US based parent company, leading to practical problems with respect to creation of adequate provisions on the basis of cogent material. We have also noted that the assessee had presented a copy of the ledger account to the AO which showed that the expenses were actually incurred in October 2005. The incurring of expenses, or its bonafides, are thus not really in doubt. In these circumstances, in our considered view, the disallowance was not really called for. We, therefore, direct the AO to delete this disallowance. Denial of carry forward of Long Term Capital Loss and setting it off against exempt Long Term Capital Gains - assessee had claimed exemption under section 10(38), in respect of the long term capital gain - HELD THAT - We find that the issue is now covered, in favour of the assessee, by a decision of the coordinate bench, in the case of G K Ramamurthy Vs JCIT 2010 (2) TMI 28 - ITAT BOMBAY-G we uphold the plea of the assessee. The action of the Assessing Officer on this point is reversed, and the set off of loss carried forward as thrust by the Assessing Officer, is vacated. TP Adjustment - adjustment on account of international transaction of sales made to the Associated Enterprises - imposing internal CPM by comparing margins on sale to AEs and non-AEs - HELD THAT - Just because the assessee has sold the same product, as exported to the AEs, to the domestic enterprises, CPM method cannot be applied. That is precisely what the TPO has done. There is no other objection taken by the authorities below. There is a difference in geographical location of the market as also in the value chain and utility of the product. It is also important to bear in mind that while the products sold by the assessee to the AEs are propriety products, having unique specifications which non AEs cannot obtain from others, the assessee is in a position to fetch higher prices for the same from non-AEs.. The action of the TPO, in imposing internal CPM by comparing margins on sale to AEs and non-AEs, cannot thus be justified. The benchmarking, on TNMM basis as a corroborative measure, also justifies this conclusion. In view of all these factors, and as sales to the AEs and non-AEs, which belong to different class of markets, cannot be compared on the peculiar facts of this case, the assessee is indeed justified in its plea. We uphold the same and direct the Assessing Officer to delete the impugned ALP adjustment. Disallowing provision towards warranty expenses - HELD THAT - This issue is covered, in favour of the assessee, by a coordinate bench decision in assessee s own cases for the assessment yea₹ 2000-01, 2001-02, 2002-03, and 2004-05. DR, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon ble jurisdictional High Court has declined to admit the appeal on this issue and the matter has thus attained finality. Thus we uphold the plea of the assessee and direct the AO to delete the impugned disallowance. Adjustment in relation to the international transaction relating to payment of Royalty - HELD THAT - What the TPO has adopted to be an ALP is essentially on the basis of intra AE transactions but in the scheme of CUP analysis such an approach is not permissible. The approach adopted by the authorities below is thus wholly devoid of legally sustainable merits. There is no other justification for the impugned ALP adjustment. In any case, in the assessment year 2006-07, these royalty payments have been held to be arm s length payments by the DRP and that matter rests there. In view of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee. The Assessing Officer is, accordingly, directed to delete the impugned ALP adjustment. The assessee gets the relief accordingly Adjustment in relation to the international transaction relating to sales made to Associated Enterprises - HELD THAT - Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of sales to AEs. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment also stands deleted. TDS u/s 195 - disallowing the commission expenses paid to non residents - HELD THAT - As the recipient of the commission did not have any tax liability in respect of income embedded in such payments and as liability under section 195 can come into play only when the recipient has a tax liability in respect of income embedded in the related payments, the assessee cannot be faulted for not having deducted tax at source, and, disallowance under section 40(a)(i) does not, therefore, come into play. Respectfully following the views so expressed in WELSPUN CORPORATION LIMITED AND VICE-VERSA 2017 (1) TMI 1084 - ITAT AHMEDABAD , with which we are in considered agreement, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance

Summary

Issues Involved:
1. Disallowance of provision for warranty expenses.
2. Disallowance of provision for expenses.
3. Disallowance of prior period expenses.
4. Denial of carry forward of long-term capital loss.
5. Adjustment of international transaction of sales to Associated Enterprises (AEs).
6. Adjustment of international transaction relating to payment of royalty.
7. Disallowance of commission expenses paid to non-residents.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Warranty Expenses:
The assessee's grievance regarding the disallowance of ?1,52,18,826 for warranty expenses was upheld in favor of the assessee. The tribunal noted that this issue was covered by earlier decisions in the assessee’s own cases for previous assessment years, which were not contested further by the jurisdictional High Court, thus attaining finality. The tribunal directed the Assessing Officer to delete the disallowance.

2. Disallowance of Provision for Expenses:
The assessee contested the disallowance of ?5,00,000 as provision for expenses, arguing that it was based on past experience due to the short timeframe for finalizing accounts. The tribunal allowed the provision to the extent of ?92,444, which was actually paid in the subsequent year, but upheld the disallowance of the remaining amount due to lack of scientific basis for its quantification.

3. Disallowance of Prior Period Expenses:
The assessee's claim for prior period expenses of ?97,286 was disallowed by the Assessing Officer on the grounds that no provision was made in the previous year. The tribunal found this reasoning flawed, noting that the expenses were actually incurred and recorded in October 2005. The tribunal directed the Assessing Officer to delete the disallowance.

4. Denial of Carry Forward of Long-Term Capital Loss:
The tribunal addressed the denial of carry forward of long-term capital loss of ?11,66,067, which the Assessing Officer argued should have been set off against exempt long-term capital gains. The tribunal cited a coordinate bench decision, which clarified that exempt income under Section 10(38) does not enter the computation of total income, thus allowing the carry forward of the capital loss.

5. Adjustment of International Transaction of Sales to AEs:
The tribunal reviewed the adjustment of ?2,31,92,365 made by the TPO, who argued that the profit margin on sales to AEs was significantly lower than sales to non-AEs. The tribunal found that the products sold to AEs and non-AEs operated in different markets with different conditions, making the comparison inappropriate. The tribunal directed the deletion of the ALP adjustment, noting that the TNMM method corroborated the assessee’s pricing.

6. Adjustment of International Transaction Relating to Payment of Royalty:
The tribunal addressed the adjustment of ?82,87,963 related to royalty payments, where the TPO applied a uniform rate of 5% for both domestic and export sales, contrary to the assessee’s application of 5% for domestic and 8% for export sales. The tribunal found that the regulatory framework recognized different rates for domestic and export royalties and that intra-AE transactions could not serve as valid CUP inputs. The tribunal directed the deletion of the ALP adjustment.

7. Disallowance of Commission Expenses Paid to Non-Residents:
The tribunal addressed the disallowance of ?20,04,492 paid as commission to non-residents, which the Assessing Officer argued should have been subject to TDS under Section 40(a)(i). The tribunal, citing various decisions, concluded that since no part of the commission agent's operations were carried out in India, the income did not accrue or arise in India, thus no TDS was required. The tribunal directed the deletion of the disallowance.

Conclusion:
The tribunal allowed the assessee’s appeals for the respective assessment years, directing the deletion of disallowances and adjustments made by the Assessing Officer and TPO on various grounds, thereby providing relief to the assessee.