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2018 (1) TMI 1716 - AT - Income TaxTP Adjustment - determining of ALP of transaction of payment of trademark fees paid by the taxpayer to its AE - HELD THAT - We are of the considered view that since there is a direct nexus between the revenue earned by the taxpayer and the payment made by the taxpayer on account of royalty, the transaction of payment of royalty cannot be analyzed in isolation. Furthermore, the doctrine of benefit test applied by the TPO cannot be invoked as it is prerogative of the businessman to see if any service is beneficial to the promotion of its business or not. So, consequently, the AO is directed to delete the adjustment made on account of ALP of international transaction of payment of trademark fees. TP adjustment of Advertisement, Marketing and Sales Promotion (AMP) - HELD THAT - As it is not in dispute that there is no change in the business model of the taxpayer so far as AMP expenses are concerned since AYs 2007-08, 2008-09 2009-10. The coordinate Bench of the Tribunal in taxpayer s own case (supra) proceeded to hold that incurring of AMP expenses by the taxpayer is not an international transaction of brand building of Goodyear brand undertaken by the taxpayer with AE and as such, no adjustment can be made. Netting off of export incentive from the cost of goods sold and set aside the issue of netting off of rebate/ discount from the cost of goods sold to the file of AO/TPO for verification of the claim in view of the decision rendered by the Tribunal for AY 2006-07 2012 (12) TMI 1166 - ITAT DELHI by providing an opportunity of being heard to the taxpayer. Disallowance of provision made by the taxpayer for replacement loss - taxpayer has not incurred expenditure on account of replacement of goods in the subsequent years; that the same is not ascertained and is contingent in nature - HELD THAT - The taxpayer has filed complete details on the basis of past trends and experience of actual guarantee claims on a scientific and actual basis, we are of the considered view that provision for warranty made by the taxpayer is allowable one. Disallowance being 30% of the total expenditure - taxpayer has incurred the said advertisement and publicity expenditure for brand building for the entities owning the brand - HELD THAT - We are of the considered view that when the Bench has already held that the taxpayer has incurred advertisement expenses wholly for the purpose of business and profession, the same are required to be allowed in full. So, in the given circumstances, ad hoc disallowance of advertisement expenses incurred by the taxpayer is not permissible under law. So, AO is directed to delete the same accordingly. Disallowance on account of shortfall on interest of provident fund - failure of the taxpayer to file clarification or supporting documents - HELD THAT - When the provident fund dues are not deposited by the employer in time, the interest payable thereon would become part of the provident fund dues and section 43B of the Act would be attracted. However, when the taxpayer has actually paid the interest, section 43B would not be attracted and the taxpayer is entitled to claim deduction thereof. So, we are of the considered view that AO/DRP have erred in making disallowance allegedly on account of shortfall of interest of provident fund. Consequently, the AO is directed to allow the same after verifying the facts as to the payment of dues paid along with interest by the taxpayer. Addition being the misc. charges and service tax written off out of misc. expenditure - expenditure were not supported by vouchers and the taxpayer has failed to prove that the expenditure were incurred wholly and exclusively for the purpose of business; that the taxpayer has failed to deduct tax at source on certain expenditure and that some of the expenditure are in the nature of capital expenditure - HELD THAT - Undisputedly, accounts of the taxpayer are audited by the statutory auditor, tax auditors as well as cost auditors which are substantiated with necessary documents. When the accounts of the taxpayer are duly audited by the statutory auditors and proves to be supported with documents discussed in preceding paras, the Income-tax authorities are not only required to accept auditor s report but also to draw the proper inference from the same. Reliance in this regard is placed on the decision rendered in the case of Jay Engineering Ltd. 1978 (2) TMI 94 - DELHI HIGH COURT When the taxpayer raised specific objection before the ld. DRP qua disallowance of the aforesaid expenses, the ld. DRP has issued specific direction to the AO to allow these expenses if the same are found to be genuine on filing necessary evidence in support of its claim by the taxpayer. When the accounts are audited and duly supported with evidences discussed in the preceding paras, the AO is to allow the same after verifying its genuineness and to proceed accordingly. Decided in favour of the taxpayer. Disallowance being the provision for obsolete stocks and spares - it was only a provision and not an actual write off and on the ground that the taxpayer has failed to provide the basis and working of the provision of the obsolete stores and spares - HELD THAT - The taxpayer has brought on record the complete details of obsolete stocks and spares, available - DRP directed the AO to allow the provision of obsolete stocks and spares in case the same has been scientifically worked out. However, the AO proceeded to disallow the same on the ground that the taxpayer has failed to produce the details of the stocks and spares written off. When the taxpayer has brought on record details of amount and items of slow moving article and the Revenue has not disputed that this system is being followed bonafidely by the taxpayer, the AO was required to follow the rule of consistency. So, in view of the matter, AO is directed to delete the disallowance on account of stores and spares written off after verifying the documents available. Ad hoc disallowance being 50% of the salary of administrative staff of the taxpayer - as attributed to capital work-in-progress and was required to be capitalized along with capital work-in-progress - HELD THAT - As taxpayer carried out the expansion of the existing business for which services of Managing Director and Plant Supervisor who have also monitored and ensured day-to-day running of the factory and production along with capital work-in-progress for expansion of the same unit were availed of, which satisfies the test of unity of control, interlacing of funds, common management etc. and as such, their salary to the extent of 50% capitalized because the salary drawn by them is revenue expenditure. Consequently, we order to delete the disallowance made by the AO and determine this ground in favour of the taxpayer. Disallowance on account of stores and spares written off - details and supporting evidences of the written off stores and spares have not been furnished and the same was not verifiable with reference to physical disposal - HELD THAT - When we examine profit and loss account of the taxpayer, it shows that the taxpayer is a growing company having gross sale of Rs. 1167 crores as on March 31, 2010 as against Rs. 980 crores in the earlier years with gross profit of Rs. 734 crores as against Rs. 329 crores in the previous year and in the given circumstances, to write off useless stores is a business decision of the management which cannot be questioned particularly when the accounts of the taxpayer are audited one with supporting evidence. The taxpayer has brought on record the complete details of the written off stores and spares,. So, disallowance made by the AO on account of stores and spares written off is not sustainable, hence disallowance is ordered to be deleted - Decided in favour of assessee.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Transfer Pricing adjustments related to trademark fees. 3. Transfer Pricing adjustments related to Advertisement, Marketing, and Sales Promotion (AMP) expenses. 4. Disallowance of provision for replacement loss. 5. Ad hoc disallowance of advertisement and publicity expenses. 6. Disallowance of miscellaneous charges and service tax written off. 7. Disallowance of provision for obsolete stock of shares. 8. Ad hoc disallowance of salary attributed to capital work in progress. 9. Disallowance of stores and spares written off. 10. Interest on late payment of provident fund under Section 43B. 11. Consequential adjustments under Section 234B and Section 234C. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The taxpayer, engaged in manufacturing and trading of tyres, used the Transactional Net Margin Method (TNMM) for benchmarking its international transactions. The Transfer Pricing Officer (TPO) applied the "doctrine of benefit" to determine the ALP of trademark payments to be nil, proposing adjustments based on the taxpayer's promotion of the brand of its Associated Enterprise (AE). 2. Transfer Pricing Adjustments Related to Trademark Fees: The Tribunal followed the decision in the taxpayer’s own case for previous years, confirming that the payment of trademark fees has a direct nexus with the revenue earned and cannot be analyzed in isolation. The doctrine of benefit test applied by the TPO was deemed inappropriate. Consequently, the adjustments made by the TPO for trademark fees for the assessment years 2010-11, 2011-12, and 2012-13 were deleted. 3. Transfer Pricing Adjustments Related to AMP Expenses: The Tribunal referred to its previous decisions and the Delhi High Court rulings, concluding that AMP expenses incurred by the taxpayer do not constitute an international transaction of brand building for the AE. Therefore, the adjustments made by the TPO for AMP expenses were ordered to be deleted. 4. Disallowance of Provision for Replacement Loss: The Tribunal upheld the taxpayer's method of making provisions for replacement loss based on past trends and scientific estimates, following its own decisions in earlier years. The provision for warranty was deemed allowable. 5. Ad Hoc Disallowance of Advertisement and Publicity Expenses: The Tribunal followed its earlier rulings, stating that the advertisement expenses incurred by the taxpayer were wholly for business purposes and should be allowed in full. The ad hoc disallowance made by the AO was deleted. 6. Disallowance of Miscellaneous Charges and Service Tax Written Off: The Tribunal noted that the taxpayer’s accounts were audited and supported by necessary documents. The AO was directed to allow the expenses after verifying their genuineness. 7. Disallowance of Provision for Obsolete Stock of Shares: The Tribunal directed the AO to delete the disallowance after verifying the taxpayer's detailed records of obsolete stocks and spares, following the principle of consistency. 8. Ad Hoc Disallowance of Salary Attributed to Capital Work in Progress: The Tribunal held that since the taxpayer was expanding its existing business, the salary expenses related to the administrative staff should be treated as revenue expenditure. The disallowance made by the AO was deleted. 9. Disallowance of Stores and Spares Written Off: The Tribunal found that the taxpayer’s decision to write off stores and spares was a business decision supported by audited accounts. The AO was directed to delete the disallowance. 10. Interest on Late Payment of Provident Fund under Section 43B: The Tribunal referred to the Delhi High Court’s ruling that interest on delayed payment of provident fund becomes part of the provident fund dues. Since the taxpayer had paid the interest, Section 43B was not applicable, and the disallowance was to be deleted. 11. Consequential Adjustments under Section 234B and Section 234C: These grounds were deemed consequential and required no separate adjudication. Conclusion: The Tribunal allowed the appeals for statistical purposes, directing the AO to delete various disallowances and adjustments after verifying the taxpayer's claims and supporting documents. The decisions were largely based on the principle of consistency and previous rulings in the taxpayer's own cases.
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