2017 (9) TMI 1836 - AT - Income Tax

TP Adjustment - rejection of aggregation approach by the TPO - HELD THAT - Once the business strategy adopted by the assessee is an accepted manner of conducting its business, then the same should be accepted and should not be segregated. There is no merit in the approach of the TPO in segregating the import of straws from the division of packaging material and benchmarking it separately by considering loss in the said division. The reason for loss on sale of straws is the business strategy adopted by the assessee to sell its packaging material and the loss, if any, suffered by the assessee gets absorbed in the sale of manufactured packaging material on overall basis. Accordingly, we hold that sale of machines, packaging material and the straws are closely interlinked and the same cannot be evaluated separately because of business strategy adopted by the assessee. Here, we may refer to the definition of transaction as prescribed in Rule 10A(d) of the Rules, which clearly states that the transaction includes number of closely linked transactions. Hence, the provisions of the Act also recognizes person to undertake its international transactions by including any number of closely interlinked transactions. We uphold the business strategy adopted by the assessee which would follow that sale of machinery, packaging material and straws, etc. were closely interlinked and the same could not be evaluated separately. The aggregation approach adopted by the assessee in benchmarking its international transactions of closely interlinked transactions is thus, accepted. TPO while benchmarking two segments of sale of packaging machinery and equipment and sale of straws as functionally separate, had applied same margin of 5.87% of comparable companies for both the functionally different segments. Where the two segments are treated as functionally different from each other, then the same could not be compared with the margins of same comparable companies for both the segments. Accordingly, we accept the aggregation approach applied by the DRP and dismiss the grounds of appeal raised by the Revenue. Provision of warranty - assessee claims that as part of its sale and supply of processing equipment and filling machines, it was offering warranty for 12 months from the date of commissioning or 18 months from the date of delivery, whichever was earlier - HELD THAT - The issue arising in the present appeal is squarely covered by the similar issue as in earlier year 2016 (12) TMI 1355 - ITAT PUNE and even the DRP and the Assessing Officer had disallowed the claim of assessee, since similar claim was not allowed in earlier years. Following the same parity of reasoning, we direct the Assessing Officer to allow the claim of provision for warranty

Issues Involved:

1. Aggregation of International Transactions
2. Disallowance of Prior Period Expenses
3. Disallowance of Incremental Provision for Warranty
4. Disallowance of Deposits Written Off
5. Transfer Pricing Adjustment

Detailed Analysis:

1. Aggregation of International Transactions:

The Revenue challenged the Dispute Resolution Panel (DRP)'s decision to aggregate all international transactions of the assessee, arguing that transactions should be evaluated individually as per section 92(1) and Rule 10C(1) of the Income Tax Act. The DRP, however, accepted the assessee's approach of treating the transactions as interlinked and part of a single business strategy, which was consistent with the OECD Transfer Pricing Guidelines and the ICAI Guidance Notes. The Tribunal upheld the DRP's decision, stating that the transactions were closely linked and the aggregation approach was appropriate for benchmarking the international transactions. The Tribunal also noted that the TPO's approach of treating different segments as functionally separate but applying the same margin for both was incorrect.

2. Disallowance of Prior Period Expenses:

The assessee's appeal included a ground against the disallowance of prior period expenses amounting to ?1,02,19,142/-. However, this ground was not pressed by the assessee during the hearing, and hence, it was dismissed.

3. Disallowance of Incremental Provision for Warranty:

The assessee claimed a deduction for an incremental provision for warranty expenses amounting to ?1,27,01,521/-. The DRP and Assessing Officer had disallowed this claim, referencing similar disallowances in previous years. The Tribunal referred to its decision in the assessee's case for the assessment year 2008-09, where it had allowed the provision for warranty expenses, recognizing it as a contingent liability based on the Supreme Court's decision in Rotork Controls India P. Ltd. vs. CIT. Following this precedent, the Tribunal directed the Assessing Officer to allow the provision for warranty expenses for the current year as well.

4. Disallowance of Deposits Written Off:

The assessee's appeal included a ground against the disallowance of deposits written off amounting to ?16,57,856/-. This ground was also not pressed by the assessee during the hearing, and hence, it was dismissed.

5. Transfer Pricing Adjustment:

The Revenue's appeal contended that the DRP erred in allowing the aggregation approach for benchmarking international transactions and in not considering the functional differences between segments. The Tribunal dismissed the Revenue's appeal, supporting the DRP's acceptance of the aggregation approach and rejecting the TPO's segmentation and separate benchmarking of transactions. The Tribunal emphasized that the business strategy and closely linked nature of the transactions justified the aggregation approach.

Conclusion:

The Tribunal upheld the DRP's decision to aggregate the international transactions for transfer pricing analysis and allowed the assessee's claim for the provision of warranty expenses. The appeals regarding prior period expenses and deposits written off were dismissed as they were not pressed by the assessee. The Tribunal's decision reinforced the importance of considering business strategy and the interlinked nature of transactions in transfer pricing cases.

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