2023 (1) TMI 1248 - AT - Income Tax

TP Adjustment - Manufacturing Segment - Adjustment towards under-utilized capacity - HELD THAT - As if the assessee has under-utilization capacity during the subject assessment year and it will be factually and legally eligible for an adjustment for the same. However in the instant case same is not demonstrated except stating the installed capacity and utilization level. For the aforesaid reasoning we reject the plea of the assessee as regards the adjustment of under-utilization capacity. Restriction of adjustment to the value of international transaction - In terms of section 92CA of the I.T.Act the A.O. can refer the matter to the TPO for computation of ALP in relation to the international transaction and the TPO had empowered compute the ALP only in respect of the international transaction. No adjustment can be made in respect of transaction entered into with non-AEs. Therefore the action of the TPO to make TP adjustment at entity level instead of restricting it to international transaction is not legally correct. In the case of CIT v. Phoenix Mecano (India) Pvt. Ltd. 2017 (6) TMI 1240 - BOMBAY HIGH COURT had held that the determination of ALP ought to be restricted to the transaction with the AEs. The Special Leave Petition preferred by the Revenue 2018 (7) TMI 798 - SC ORDER against Hon ble Mumbai High Court judgment was dismissed by the Hon ble Supreme Court (supra). The Bangalore Bench of the Tribunal in IKA India (P.) Ltd. 2018 (10) TMI 49 - ITAT BANGALORE has also held that the transfer pricing adjustment should be only restricted to the AE related transaction of the assessee. The Tribunal in the said case followed its earlier order in assessee s own case for assessment year 2012-2013. In the light of the aforesaid reasoning and the judicial pronouncements cited supra we direct the TPO to compute the TP adjustment restricting the same to the transaction with the AEs. Exclusion of certain companies from the comparable list - Exclusion of Smart Card IT Solutions Limited to AO / TPO to apply the test of functionality consistently. Sark Synertek Limited - We find that the assessee had considered comparables like BLG Electronics Circuit Systems and Fine Line Circuits Limited which are also primarily engaged in the business of manufacture of printed circuit boards and the assessee has not objected to these companies to be taken as comparables as they have low profits. As mentioned earlier the test of functionality should be applied consistently to all the company by the TPO and assessee. There cannot be cherry picking by both the assessee as well as the TPO. Therefore we are of the view that the matter needs to be examined afresh by the AO / TPO to apply the test of functionality consistently. Electronics Corporation of India Limited - The annual report of ECI (Index of Annual Report). The ESI is to be rejected as a comparable on the ground that it is a Government company. In this context we rely on the order of case of Thyssenkrupp Industries India (P.) Ltd. v. Addl.CIT 2013 (11) TMI 930 - ITAT MUMBAI Though the assessee had taken this company as a comparable in its TP study the assessee can raise objections to the comparability of the said company before the TPO or before the appellate forums. In this context we rely on the judgment of CIT v. Tata Power Solar Systems Limited 2016 (12) TMI 1600 - BOMBAY HIGH COURT and in the case of DCIT v. Quark Systems Pvt. Ltd. 2009 (10) TMI 591 - ITAT CHANDIGARH Adjustment determined in respect of warranty cost - We find that an identical issue was considered by the Tribunal in assessee s own case for assessment years 2009-2010 2010-2011 and also for assessment year 2012-2013. The issue raised in the above ground 3 of the transfer pricing segment was restored to the AO / TPO to examine whether the assessee had recovered expenditure incurred in respect of warranty services with the mark-up of 5%. As in assessee s own case which is identical to the facts of the year under consideration we restore ground 3 (TP segment) to the files of the AO / TPO. It is ordered accordingly. Disallowance u/s 40(a)(ia) for short deduction of tax - HELD THAT - The Hon ble jurisdictional High Court in the case of CIT v. Kishore Rao Others (HUF) 2016 (4) TMI 430 - KARNATAKA HIGH COURT had held that short deduction of tax would not attract disallowance u/s 40(a)(ia) of the I.T.Act. The Hon ble jurisdictional High Court placed reliance on the judgment in the case of CIT v. S.K.Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT - we delete the disallowance. Disallowance u/s 40(a)(ia) with regard to rebate given to the customers - HELD THAT - Tribunal in assessee s own case for assessment year 2010-2011 2023 (3) TMI 809 - ITAT BANGALORE had considered an identical issue and restored the same to the files of the A.O. The Tribunal directed the A.O. to consider various clauses of the distribution agreement entered by the assessee with its distributors and to determine whether the payments made is a rebate / discount on a principal to principal basis or whether it is a principal to agent basis. Thus in view of the above order of the Tribunal in assessee s own case (supra) we restore the issue raised. Addition of deferred revenue expenses - HELD THAT - We find an identical issue was considered by the Tribunal in assessee s own case for assessment year 2010-2011 2023 (3) TMI 809 - ITAT BANGALORE on perusal of the sample warranty agreements and following the Co-ordinate Bench order in the case of Schneider Electric IT Business India Pvt. Ltd. v. JCIT LTU 2019 (4) TMI 1770 - ITAT BANGALOR deleted the addition on account of deferred revenue expenses - Thus addition deleted. TDS u/s 194H - Disallowance of claim u/s 40(a)(i) / 40(a)(ia) - rebate given to the customers under stock and sell model - nature of the expenditure and details of the TDS were not provided by the assessee - HELD THAT - As decided in own case 2010-2011 2023 (3) TMI 809 - ITAT BANGALORE lower authorities have to examine whether the year-end provision made on 31st March 2009 is fully reversed on 1st April 2009 and the expenses against which the provision was created is debited to the profit and loss account on payment after deducting TDS. This verification need to be carried out based on the journal entries and ledger copies produced by the assessee for the year under consideration which are submitted now in the form of additional evidence. If the accounting practice of the assessee to reverse the expenses on the 1st day of April of the year under consideration is substantiated by the evidences submitted by the assessee whereby it is demonstrated that there is no doubt allowance expenditure then the assessee would be entitled to claim the amount disallowed in the previous assessment year as otherwise it would amount to double disallowance. We therefore remit the issue back to the AO to verify the ledger and general entries of the assessee for the year under consideration. Allowability of fixtures and stores interiors expenses - allowable revenue expenditure or not? - HELD THAT - We find an identical issue was considered by the Tribunal in assessee s own case for assessment year 2012-2013 as followed the case of M/s.Nike India Private Limited 2022 (7) TMI 1329 - ITAT BANGALORE after considering the franchisee agreement entered by the assessee with its franchisees held that the expenditure incurred is in the nature of revenue and the same is to be allowed as a deduction - thus we direct the A.O. to allow the said expenditure as a revenue expenditure. Disallowance of interest on delayed payment of TDS - assessee had paid interest u/s 201(1A) and claimed the same as an allowable expenditure u/s 37 - HELD THAT - We find on identical facts the Bangalore Bench of the Tribunal in the case of Velankani Information Systems Ltd. 2018 (10) TMI 68 - ITAT BANGALORE had decided the issue against the assessee - Thus we hold that the interest on delayed payment of TDS is not an allowable deduction. Disallowance of unpaid Central Sales Tax (CST) - assessee had not added back unpaid Central Sales Tax (Rajasthan) as per the provisions of section 43B and same was reflected under clause 21(1)(B)(b) to Form No.3CD - HELD THAT - We find on identical issue the Tribunal in the case of Smt.Husna Parveen 2022 (8) TMI 1219 - ITAT VARANASI by following the judgment of Chowringhee Sales Bureau (P.) Ltd. 1972 (10) TMI 4 - SUPREME COURT had decided the issue against the assessee. Short credit of TDS - AR submitted that despite the directions of the DRP the A.O. failed to verify the latest Form No.26AS and allow TDS credit - HELD THAT - The issue raised is restored to the files of the A.O. The A.O. is directed to examine the issue afresh as per the directions of the DRP and grant due tax credit as per law. It is ordered accordingly.

Summary

Issues Involved:

1. Determination of Arm's Length Price (ALP) in the Manufacturing Segment.
2. Adjustment towards Warranty Cost.
3. Disallowance under Section 40(a)(ia) for Short Deduction of Tax.
4. Disallowance of Rebate and Volume Discount under Section 40(a)(ia).
5. Disallowance of Deferred Revenue.
6. Disallowance of Claim under Section 40(a)(i) / 40(a)(ia).
7. Classification of Fixtures and Stores Interiors Expenses.
8. Disallowance of Interest on Delayed Payment of TDS.
9. Disallowance of Unpaid Central Sales Tax (CST).
10. Short Credit of TDS.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) in the Manufacturing Segment:

The assessee, engaged in manufacturing activities, used the Transactional Net Margin Method (TNMM) to determine the ALP of international transactions with its Associated Enterprises (AEs). The TPO, however, rejected the assessee's TP study and made adjustments totaling Rs.307,69,14,132. The TPO selected eleven comparables and rejected the adjustment for under-utilized capacity. The Tribunal found the TPO's rejection of the under-utilized capacity adjustment justified due to lack of detailed analysis on fixed, variable, and semi-variable costs. However, it directed the TPO to restrict the TP adjustment to transactions with AEs, following the precedent set by the Bombay High Court in CIT v. Phoenix Mecano (India) Pvt. Ltd.

2. Adjustment towards Warranty Cost:

The TPO made an adjustment on the basis that the assessee had not recovered warranty service costs from its AEs. The Tribunal, referencing its earlier decisions in the assessee's own case, restored the issue to the AO/TPO to verify if the assessee had indeed recovered the costs with a 5% markup.

3. Disallowance under Section 40(a)(ia) for Short Deduction of Tax:

The AO disallowed Rs.4,18,320 for short deduction of tax under Section 194J. The Tribunal, citing the Karnataka High Court's decision in CIT v. Kishore Rao & Others (HUF), held that short deduction does not attract disallowance under Section 40(a)(ia) and deleted the disallowance.

4. Disallowance of Rebate and Volume Discount under Section 40(a)(ia):

The AO disallowed Rs.52,42,23,354, treating the payments as commission requiring TDS under Section 194H. The Tribunal, following its decision in the assessee's case for AY 2010-2011, restored the issue to the AO to determine if the transactions were on a principal-to-principal basis, which would not attract Section 194H.

5. Disallowance of Deferred Revenue:

The AO added Rs.100,30,45,893 as deferred revenue, stating the Income-tax Act does not recognize deferred revenue. The Tribunal, following its earlier decisions in the assessee's own case, deleted the addition, recognizing the matching principle of accounting.

6. Disallowance of Claim under Section 40(a)(i) / 40(a)(ia):

The AO disallowed Rs.21,51,09,398 due to non-furnishing of TDS details and treating rebates as commission. The Tribunal, following its decision for AY 2010-2011, restored the matter to the AO to verify the details and allow the deduction if TDS was correctly deducted.

7. Classification of Fixtures and Stores Interiors Expenses:

The AO classified Rs.2,67,16,286 as capital expenditure. The Tribunal, following its decision in the assessee's own case for AY 2012-2013, held the expenditure as revenue in nature and directed the AO to allow it as such.

8. Disallowance of Interest on Delayed Payment of TDS:

The AO disallowed Rs.26,349 paid as interest under Section 201(1A). The Tribunal, following the Madras High Court's decision in CIT v. Chennai Properties & Investment Ltd., upheld the disallowance, stating interest on delayed TDS payment is not allowable.

9. Disallowance of Unpaid Central Sales Tax (CST):

The AO disallowed Rs.2,006 of unpaid CST. The Tribunal, following the Supreme Court's decision in Chowringhee Sales Bureau (P.) Ltd. v. CIT, upheld the disallowance, stating unpaid CST is disallowable under Section 43B.

10. Short Credit of TDS:

The AO granted TDS credit less than claimed. The Tribunal restored the issue to the AO to verify the Form 26AS and grant the correct TDS credit as per the DRP's directions.

Conclusion:
The Tribunal provided detailed directions for each issue, emphasizing the need for proper verification and adherence to judicial precedents. The appeal was partly allowed, with several issues remanded for re-examination.