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2022 (12) TMI 1073 - AT - Income TaxTP adjustment - Selection of MAM - rejecting RMP - value of international transactions pertaining to the import of spare parts and cranes/ machines for trading purpose entered - Non granting the excise duty adjustment and closing stock adjustment sought - HELD THAT - Appellant had received service commission from AEs in Austria, Germany, France and Switzerland under separate contracts. The international transactions under consideration are of different nature. In the two immediately preceding assessment years the appellant had furnished segmental working for commission segment, service segment and trading segment, and the International Transactions pertaining to trading segment were benchmarked using RPM. Vide Letter, dated 28.10.2015, filed during the assessment proceedings the Appellant has expressed the apprehension that reliable data may not be available from publicly available database to facilitate application of RPM and that hidden differences in accounting of direct costs can lead to distorted results. Given the fact that the Appellant had adopted RPM in the immediately two preceding assessment years and not faced such hindrances, we are not persuaded to accept the aforesaid apprehension of the Appellant as a genuine reason for rejecting RMP Trading segment of the Appellant involves import of spares and machinery from AEs for sale to customers in India without making any value addition. The Appellant had adopted RPM as most appropriate method for benchmarking international transactions pertaining to trading segment during the Assessment Year 2010-11 and 2011-12. It is admitted position that there is no change in the facts and circumstances during Assessment Year AY 2012-13 as compared to AY 2010-11 and 2011-12. Revenue was justified in rejecting the aggregation approach adopted by the Appellant and in adopting RPM to benchmark international transactions pertaining to trading segment. Economic adjustments sought by the Appellant - We are of the view that the TPO/AO/DRP were correct in rejecting the same as the Appellant has failed to establish how the economic adjustments claimed by the Appellant could materially affect‟ the amount of gross profit margin in the open market as per the requirements of Rule 10B(1)(b) of the Income Tax Rules, 1962. Impact of the custom duty adjustments and closing stock adjustment sought by the Appellant can be discerned on the basis of the standalone computation provided by the Appellant. Further, as rightly noted by the DRP, closing stock adjustment claimed by the Appellant was not required in view of the fact that the financials of the Appellant as well as the comparable companies were prepared in accordance with the Accounting Standard 2. Where the higher import content is reflective of the difference in business models of the assessee and the comparables, adjustments can be made for functional differences. Therefore, in our view, the DRP was justified in not granting the excise duty adjustment and closing stock adjustment sought by the Appellant. Deduction as travelling and conveyance expenses - We note that during the assessment proceedings for relevant assessment year disallowance of 100% of travelling and conveyance expenses has been made in identical facts and circumstances. In appeal for the earlier years such disallowance has been restricted to 10% of the travelling and conveyance expenses by the Tribunal - Thus we restrict the disallowance of travelling and conveyance expenses to 10% of the amount debited to Profit Loss account during the relevant previous year. Appeal filed by the Appellant is partly allowed.
Issues Involved:
1. Adjustment on account of import of spare parts and cranes/machines. 2. Ad-hoc disallowance of traveling expenses. 3. Other unwarranted and erroneous conclusions by AO/DRP/TPO. Issue-Wise Detailed Analysis: 1. Adjustment on account of import of spare parts and cranes/machines: The Appellant challenged the upward adjustment of INR 2,72,11,637/- made by the AO/DRP/TPO to the value of international transactions related to the import of spare parts and cranes/machines. The Appellant argued that these transactions were at arm's length and that the AO/DRP/TPO erred in rejecting the aggregation approach and separately benchmarking the transaction. The Appellant also contended that the AO/DRP/TPO did not grant adjustments for differences in customs duty and closing stock. The Tribunal noted that the Appellant, a subsidiary of Liebherr Group, engaged in sales promotion, sales/servicing of equipment, and provision of supervisory and after-sales services, had adopted the Transactional Net Margin Method (TNMM) for benchmarking, aggregating all international transactions. The TPO, however, rejected this approach, applying the Resale Price Method (RPM) for the trading segment, leading to a proposed adjustment of INR 7,04,81,698/-. The DRP upheld the TPO's approach and rejected the Appellant's objections, including the claim for economic adjustments. The Tribunal found that while aggregation of transactions is permissible, it must be shown to lead to more reliable results, which the Appellant failed to establish. The Tribunal upheld the rejection of the aggregation approach and the adoption of RPM for the trading segment, noting that the Appellant had not faced issues with RPM in previous years. The Tribunal also upheld the rejection of economic adjustments for customs duty and closing stock, as the Appellant did not demonstrate their material impact on gross profit margins. 2. Ad-hoc disallowance of traveling expenses: The Appellant contested the disallowance of INR 1,75,42,136/-, being 40% of traveling and conveyance expenses, arguing that the AO/DRP disregarded the details and evidence provided. The AO had disallowed these expenses, citing a lack of satisfactory evidence that they were incurred wholly for business purposes. The Tribunal noted that this issue was recurring and had been addressed in previous years. In those cases, the Tribunal had restricted the disallowance to 10% of the total traveling and conveyance expenses. Following this precedent, the Tribunal restricted the disallowance for the current year to 10% of the amount debited to the Profit & Loss account, thereby partly allowing the Appellant's grounds on this issue. 3. Other unwarranted and erroneous conclusions: The Appellant claimed that the AO/DRP/TPO arrived at various unwarranted and erroneous conclusions unsupported by relevant material. However, the Tribunal's detailed analysis of the primary issues did not specifically address these claims, implying that they were not separately adjudicated. Conclusion: The Tribunal dismissed the Appellant's grounds regarding the transfer pricing adjustment related to the import of spare parts and cranes/machines but partly allowed the grounds concerning the disallowance of traveling expenses, restricting it to 10% of the total claimed amount. The appeal was thus partly allowed.
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