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2018 (4) TMI 496 - AT - Income TaxTransfer Pricing adjustment purchase of raw materials and components - selecting AE as the tested party and CPM as MAM - Held that - As observed that assessee has not provided any details regarding FAR of AE to ascertain it to be less complex in nature. In fact assessee has only filed a letter dated 12/01/16 which demonstrates the total sales earned by AE with assessee during financial year relevant to the assessment year under consideration. It is observed from the submission dated 13/01/16 filed by assessee before ld.DCIT which is in response to the show cause notice dated 04/01/2016 that, assessee do not have financials of its AE as the same are not available on the public domain. Appendix B at page B- 933 is profitability details for products of Driveline Division (being AEs), having 100% external sales during the year ended 31/12/11. Further it is observed that the comparables selected are single set without having regard to the functions and geographical dissimilarities. It is further pertinent to observe that the most appropriate method used by assessee against AE as tested party is cost plus method. We fail to understand how the margins would be comparables in a Cost Plus Method, which is required for determining ALP of an international transaction. We also do not see any reason to set aside this issue to Ld.TPO, as assessee has categorically submitted before authorities below regarding non-availability of financial details of AE. Even before us Ld.AR did not submit there being a possibility of obtaining complete financial details of A.E. We therefore reject the arguments advanced by Ld.AR in respect of selecting AE as the tested party and CPM as MAM. Disallowance of provision for warranty claims - Held that - Claim allowed as relying on assessee s own case 2017 (9) TMI 1157 - ITAT DELHI wherein held hat the provision for warranty claim is an allowable expenditure. Disallowance of welfare expenditure under the head miscellaneous expenditure - Held that - The expenditure incurred by assessee is in the nature of corporate social responsibility which is considered to be an allowable expenditure subject to fulfilment of the conditions specified in section 32 to 36 of the Act. As assessee has not filed any details regarding these expenses before us, we are unable to ascertain whether necessary criteria as stipulated under section 32-36 of the Act stands fulfilled. We are therefore inclined to set aside this issue back to the file of Ld. AO for due verification. Disallowance due to difference in the stock - Held that - The facts of the present case assessee has not been able to demonstrate exact reason of loss and measures taken in order to compensate for the loss of stock. We are therefore unable to appreciate the arguments advanced by Ld.AR. - Decied against assessee.
Issues Involved:
1. Transfer Pricing – Purchase of raw materials and components. 2. Transfer Pricing – Management Consultancy and Business Auxiliary Services (GSA charges). 3. Disallowance of Provision for Warranty Claims. 4. Disallowance of GSA charges. 5. Disallowance u/s 14A of the Act. 6. Disallowance of welfare expenditure under the head ‘Miscellaneous expenditure’. 7. Disallowance due to stock difference. 8. General Grounds (Penalty proceedings, interest under Section 234B and 234D, and recovery of interest under Section 244A). Detailed Analysis: 1. Transfer Pricing – Purchase of raw materials and components: The assessee contested the adjustment of INR 45,871,453/- made by the TPO and upheld by the DRP regarding the international transaction of purchasing raw materials and components. The TPO rejected the Cost Plus Method (CPM) and instead applied the Transactional Net Margin Method (TNMM), using the appellant as the tested party. The DRP supported this, citing the lack of financial details of the Associated Enterprises (AEs) and the necessity for reliable comparables. The Tribunal dismissed the assessee's arguments, noting the absence of detailed FAR analysis for the AE and the unavailability of financial details. Thus, the adjustment made by the TPO and upheld by the DRP was confirmed. 2. Transfer Pricing – Management Consultancy and Business Auxiliary Services (GSA charges): The assessee did not press this ground, and it was dismissed as 'not pressed'. 3. Disallowance of Provision for Warranty Claims: The AO disallowed INR 13,708,513 related to the provision for warranty claims, treating it as contingent. The DRP directed the AO to verify the method of working of the provision and allow it if based on scientific principles. The AO gave partial relief but disallowed the remaining amount. The Tribunal, referencing past decisions in the assessee’s favor and the Supreme Court ruling in Rotork Controls (I) Private Limited vs. CIT, held that the provision for warranty claims is an allowable expenditure. Consequently, this ground was allowed in favor of the assessee. 4. Disallowance of GSA charges: The assessee did not press this ground, and it was dismissed as 'not pressed'. 5. Disallowance u/s 14A of the Act: The assessee did not press this ground, and it was dismissed as 'not pressed'. 6. Disallowance of welfare expenditure under the head ‘Miscellaneous expenditure’: The AO disallowed INR 825,822 incurred on welfare activities, stating the assessee failed to establish these expenses were incurred wholly and exclusively for business purposes. The Tribunal observed that such expenditures could be considered corporate social responsibility and allowable subject to conditions under sections 32 to 36 of the Act. The issue was remanded back to the AO for verification, and the assessee was directed to provide necessary evidence. This ground was allowed for statistical purposes. 7. Disallowance due to stock difference: The AO disallowed INR 84,596,885 due to physical loss of stock, citing discrepancies noted by auditors and lack of evidence such as FIRs or insurance claims. The DRP upheld this disallowance. The Tribunal found the assessee failed to demonstrate the exact reason for the loss or measures taken to compensate for it. Consequently, this ground was dismissed. 8. General Grounds: The Tribunal did not specifically address these grounds, implying they were not pressed or were consequential to the main issues discussed. Conclusion: The appeal was partly allowed, with the Tribunal providing relief on the provision for warranty claims and remanding the welfare expenditure issue for further verification. Other grounds were either dismissed or not pressed by the assessee.
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