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2018 (3) TMI 1199 - AT - Income TaxTPA - assessee had treated CPM as most appropriated method whereas TPO applied TNMM for benchmarking the IT s - Held that - In the case under consideration we do not find any reasoned and justifiable finding has been given by the TPO for not following CPM. But it is also true that the assessee had not followed all the steps as required by the provisions of Rule 10B(c)of the Rules. It is said that the object and purpose of TP adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred when made subject matter of the ALP by applying the CPM cannot be again factored or included as a part of interconnected international transaction and subjected to the ALP once it has been considered as per sub rule (c)(i). It is found that the TPO has not given due attention to the functional profiles of the assessee as well as of the AE/non-AE s. We find that the TPO had clubbed sales to the SAARC countries for arriving at the net profit to cost ratio. But in our opinion transactions with AE should not have been compared with the SAARC countries transactions. In short the departmental authorities as well as the assessee had not followed the proper method to benchmark the IT s entered in to during the year under consideration by the assessee. Being the first year of TP adjustment it was natural. Matter needs further verification of facts and application of the provisions of law which are very clear as on today. The confusion or ambiguity about applying the method or procedure is over and orders or higher judicial authorities are available as to how to apply CPM. Therefore we are restoring back the matter to the file of the TPO/AO for fresh adjudication. Writing off under the head capital advances - Held that - The basic analogy for allowing write-off is to consider the real nature of the transaction. The advances were made for the running of business. The expenditure was not incurred for a new project neither it was totally disconnected with the business activities carried out by the assessee. The disputed amount was advanced for tractor divison of the assessee in the normal coursr of business. - Decided in favour of the assessee. Addition of provision for doubtful debts u/s. 115JB - Held that - AR fairly considered that the issue had to be decided against the assessee because of the retrospective amendment to the section. Accordingly we dismiss ground of assessee. Addition of provision for warranty u/s. 115JB - MAT - Held that - As found that in the AY. 1989-90 the AO had considered provision for warranty as an and admissible expenditure on the ground that such provisions was in the nature of contingent lability that in the subsequent assessment years he considered the enhanced portion of warranty provisions as this allowable expenditure that the Tribunal has reverse the order of the departmental authorities while deciding the appeal for the AY. s 1989-90 to 1991-92 that the Tribunal had held that provision for warranty was not contingent lability that the FAA while deciding the appeal for the AY. 1997-98 had allowed the claim made by the assessee in respect of provisions for warranties. If we consider the principles laid down in the case of Rotork Controls India Pvt. Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA) then it becomes clear that the assessee had followed a scientific method and had considered the historical data to arrive at the correct book profit as per the provisions of section 115 JB of the Act. - Decided in favour of assessee
Issues Involved:
1. Development Expenses 2. Technical Services Fees 3. Expenditure on Licence Fee 4. Consultancy Charges 5. Prior Period Expenses 6. Disallowance under Section 40A(9) 7. Provisions for Warranties 8. Premium on Redemption of Debentures 9. Special Pension Deduction 10. Employees Compensation Expenses on Account of ESOP 11. Disallowance under Section 14A-115 JB 12. Provision for Pending Labour Demand 13. Disallowance of Appreciation on Sale of Undertakings 14. Transfer Pricing Adjustment 15. Write-off of Capital Advances 16. Addition of Provision for Doubtful Debts under Section 115JB 17. Addition of Provision for Warranty under Section 115JB 18. Expenditure on Payment to Clubs 19. Capital Expenditure Debited to P&L Account 20. Interest on Income Tax Refund Issue-wise Detailed Analysis: 1. Development Expenses: - Horizon III Project Expenses: ?8.96 crore (including staff cost, material of ?4.67 crores) was decided against the assessee. - In-house Revenue Expenditure: Staff cost and material of ?4.67 crores incurred as part of Development Projects were decided in favor of the assessee. - Euro II Project: ?47.66 lakhs was decided against the assessee. - Euro III Project: ?5.14 lakhs was decided against the assessee. - Horizon II and IV Project Expenses: ?6.14 crore (including staff cost, material of ?5.30 crores) was decided against the assessee. - In-house Revenue Expenditure: Staff cost and material of ?5.30 crores incurred as part of Development Projects were decided in favor of the assessee. 2. Technical Services Fees: - ?65,00,50,757 (including staff cost, material of ?15.55 crores) was decided against the assessee. - In-house Staff Cost and Material Consumption: ?15.55 crore incurred as part of Development Project were decided in favor of the assessee. 3. Expenditure on Licence Fee: - SAP Asia Systems: ?2.89 crore was decided in favor of the assessee. 4. Consultancy Charges: - Transport Solution Group: ?1.70 crore was decided in favor of the assessee. - Business Customer Centric: ?1.51 crore was decided in favor of the assessee. 5. Prior Period Expenses: - ?57.15 lakhs were set aside for reconsideration. 6. Disallowance under Section 40A(9): - ?9.13 lakhs was decided in favor of the assessee. 7. Provisions for Warranties: - ?6.84 crore was set aside for reconsideration. - Provision for Warranty Costs: ?23.48 crore for AY 2003-04 was set aside for reconsideration. 8. Premium on Redemption of Debentures: - ?3 lakhs was decided in favor of the assessee. 9. Special Pension Deduction: - Based on actuarial valuation of ?1.26 crore was decided in favor of the assessee. 10. Employees Compensation Expenses on Account of ESOP: - ?6.67 crore was set aside for reconsideration. 11. Disallowance under Section 14A-115 JB: - ?7.85 crore was decided in favor of the assessee. 12. Provision for Pending Labour Demand: - ?4.80 crore was decided against the AO. 13. Disallowance of Appreciation on Sale of Undertakings: - Decided against the AO. 14. Transfer Pricing Adjustment: - The adjustment on account of Transfer Pricing (TP) was partly allowed and the matter was restored back to the TPO/AO for fresh adjudication. The TPO/AO was directed to afford a reasonable opportunity of hearing to the assessee and consider the Circular while deciding the appeal. 15. Write-off of Capital Advances: - ?28.06 lakhs under the head capital advances was decided in favor of the assessee. The Tribunal followed the analogy of allowing write-off by considering the real nature of the transaction. 16. Addition of Provision for Doubtful Debts under Section 115JB: - ?6.16 crore was decided against the assessee due to retrospective amendment to the section. 17. Addition of Provision for Warranty under Section 115JB: - ?14.75 crore was decided in favor of the assessee. The Tribunal followed the principles laid down by the Supreme Court in Rotork Controls India Pvt. Ltd. and the Madras High Court in Luk India Private Ltd., determining that the provision for warranty was based on a scientific method and historical data. 18. Expenditure on Payment to Clubs: - ?39.83 lakhs for AY 2003-04 was decided in favor of the assessee. 19. Capital Expenditure Debited to P&L Account: - ?6.12 lakhs representing foreign travel expenses in connection with the acquisition which did not materialize was decided against the assessee. 20. Interest on Income Tax Refund: - ?1.26 crore for AY 2003-04 was decided against the assessee. Conclusion: The Tribunal's judgment involved multiple issues related to development expenses, technical services fees, consultancy charges, prior period expenses, provisions for warranties, and transfer pricing adjustments, among others. The Tribunal decided several issues in favor of the assessee, set aside some for reconsideration, and ruled against the assessee on a few points. The judgment emphasized the need for a scientific approach and historical data in determining provisions and expenses, particularly in transfer pricing and warranty provisions. The matter of transfer pricing was restored back to the TPO/AO for fresh adjudication, considering the Circular issued by the CBDT.
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