2023 (11) TMI 935 - AT - Income Tax

TP adjustment - downward adjustment to the aggregate value of international transactions of the appellant with its associate enterprise - Comparability - Inclusion of Victor Gaskets India Ltd as comparable - HELD THAT - The major product line of Victor Gaskets is gaskets only. Since, the appellant has itself shortlisted Talbros Automative Component and the products manufactured by Victor Gasket India Limited are similar to Talbros Automative Component, in our considered view, the TPO has rightly included Victor Gasket India Limited, in the list of final set of comparables. Further, TNMM is resistant to product profile/functional difference. Even, in OECD guidelines it has stated that net profit indicators are less affected by transactional difference as compared with other methods. Further, net profit indicators also may be more tolerant to some functional difference between the control and uncontrolled transactions than gross profit margins. Therefore, we are of the considered view that, there is no error in the reasons recorded by the ld. DRP to uphold inclusion of Victor Gaskets India Ltd as comparable and thus, we reject grounds taken by the assessee. Exclusion of Banco Gaskets (India) Ltd - It is very clear that the appellant could not give any valid reasons to exclude Banco Gaskets (India) Ltd, except for the reason of higher margin. It is well established principle of law that for higher margin, the company cannot be excluded. Further, TNMM method is resisted the product line/functional difference and this fact has been reiterated in OECD guideline. Therefore, we are of the considered view that there is no merit in arguments of the Ld. Counsel for the assessee for exclusion of Banco Gaskets (India) Ltd and thus, we reject grounds taken by the assessee. Comparability of Minda Corporation with appellant company - On comparison appellant company and Minda Corporation Ltd are similar. Further, in the TNMM method net profit indicators are less affected by transactional difference as compared with other methods. Further, TNMM is resistant to product profile/functional difference. Therefore, we are of the considered view that there is no merit in arguments taken by the Ld. Counsel for the assessee for exclusion of Minda Corporation Ltd and thus, we reject ground taken by the assessee. Talbros Automotive Components as a comparable company - As objections raised by the assessee for exclusion of Talbros Automotive Components needs to be rejected. Be that as it may. Assessee itself chosen the comparable and included the same in the TP study. The assessee has not given any valid ground for excluding Talbros Automotive Components from the list of comparables. It appears that the assessee somehow want to exclude Banco Gaskets (India) Ltd and Victor Gaskets India Ltd, both of which are included by the TPO based on Talbros Automotive Components. In absence of valid and cogent reasons, the arguments of the assessee for exclusion of any comparable cannot be accepted. Therefore, we are of the considered view that there is no error in the reasons given by the ld. DRP to reject arguments of the assessee for exclusion of Talbros Automotive Components and thus, we reject ground taken by the assessee. Rejecting the Transfer Pricing documentation maintained by the appellant and not applying multiple year data for comparable companies while determining arm s length price - HELD THAT - During TP proceedings, the TPO has issued show cause notice proposing single year data as prescribed in the Income Tax Rules, 1962, as against multiple year data used by the assessee to include certain additional filters and modify certain filters used by the assessee in its TP study, for the purpose of proper selection of comparable companies. From the above, it is very clear that, the TPO was not satisfied with ALP determined by the assessee in the TP study based on the comparables selected by using certain filters and computing three years weighted average margin of comparable companies. In our considered view, the TP documentation maintained by the assessee is not in accordance with section 92C(1) (2) and Rule 10B and 10C of I.T. Rules, 1962. Therefore, we are of the considered view that there is no error in the reasons given by the TPO/DRP to reject TP study conducted by the assessee and use of multiple year data for comparable company and thus, we reject ground taken by the assessee. Re-computation of operating margin of the assessee - re-computing operating margin of the assessee by considering foreign exchange loss as operating in nature - HELD THAT - Relevant reasons given by the TPO/DRP to reject arguments of the assessee for treating foreign exchange loss as non-operating in nature. Generally foreign exchange loss/gains incurred on trading account is operating in nature, which is directly linked to business operations of the assessee and also operating margin of any company. Coordinate bench of ITAT, Chennai in the case of GE Healthcare Bio-Sciences Ltd 2016 (5) TMI 252 - ITAT CHENNAI has held that, foreign exchange loss is operating in nature. Therefore, we are of the considered view, that there is no merit in arguments of the Ld. Counsel for the assessee, to treat foreign exchange loss as non-operating in nature and thus, we reject ground taken by the assessee. Working capital adjustment - These opening and closing figures are the balances, as they existed on the opening and closing day of the year respectively. They do not show the movements in their accounts during the year. Working capital requirements are not uniform during the entire period of the year. The disclosure of the figures of Debtors and Creditors which are important for computing the working capital adjustment does not provide the breakup of trade and non-trade nature of such balances. Further, the appellant has failed to provide such data and also resistant to provide working capital adjustment when compared to working capital levels of the assessee and working capital levels of the comparables. In absence of necessary details and also resistant for providing working capital adjustment, a general and vague argument of the assessee for providing working capital adjustment cannot be acceded. Therefore, there is no merit in arguments of the assessee for providing working capital adjustment, and thus, we are inclined to uphold the findings of the ld. DRP and reject ground taken by the assessee. TP Adjustment - custom duty adjustment - HELD THAT - Assessee has not provided any adjustment for custom duty in its own TP study. Further, the appellant had not make out a case for providing adjustment towards un-cenvatable custom duty with necessary evidences. Further, the appellant has also failed to prove that the non-cenvatable customs duty is not factored in the cost of goods manufactured and sold. In absence of any evidence, a general argument of the assessee in light of certain judicial precedents cannot be accepted. Therefore, we are of the considered view that, there is no merit in the ground taken by the assessee for custom duty adjustment and thus, we reject ground taken by the assessee. Disallowance of warranty expenses - assessee has provided for warranty on estimate basis without any scientific basis - HELD THAT - In the present case, the assessee itself has admitted that warranty has been provided on the basis of agreement with original equipment manufacturer on fixed percentage basis without scientific basis. Further, no evidence has been filed to prove as to whether such liability is crystallized or not. From the above, it is undoubtedly clear that provision for warranty expenses is contingent in nature and there is no scientific basis for working out said warranty expenses. Since, the appellant could not explain how provisions made for warranty expenses is on scientific basis and crystallized, in our considered view there is no error in the reasons given by the Assessing Officer/DRP to disallow provision for warranty expenses. Thus, we are inclined to uphold the findings of ld. DRP towards disallowance of warranty expenses and reject ground taken by the assessee. Disallowance of Pooja expenses - assessee submitted that AO erred in not considering the evidence submitted by the assessee to prove expenditure incurred towards Pooja expenses is for the benefit of employees - HELD THAT - We find that out of total expenditure, a sum claims to have been paid towards gift coupons issued to staff and workers as bonus. If the argument of the assessee is correct, then said payment needs to be examined in light of payment of the Bonus Act and provisions of section 36(1)(va) r.w.s. 43B of the Act. In so far as balance amount although the assessee claims that said expenditure was incurred for Ayudha Pooja, but no evidence has been filed to substantiate the claim. Therefore, we are of the considered view that the issue needs to go back to the file of the AO for further verification. Thus, we set aside the issue to the file of the Assessing Officer and direct the AO to reexamine the claim in light of our discussion given herein above and also any evidence that may be filed by the assessee to justify its claim. Admission of additional grounds filed by the assessee - The petition filed by the assessee for admission of additions grounds is not admissible, because if you go through the facts narrated by the assessee in their petition and ground taken in light of certain additional evidences is purely a factual issue, but not a legal issue which can be raised at any stage of proceedings. It is a well settled principle of law by the decisions of various courts, including the decision of Hon ble Supreme Court in the case of National Thermal Power Co Ltd 1996 (12) TMI 7 - SUPREME COURT that if facts with regard to any legal ground are already on record before the Assessing Officer at the time of proceedings, then said legal grounds can be admitted at any stage of proceedings. In the present case, as we have already noted, the grounds taken by the assessee in its petition are purely a factual issue, which is solely dependent on subsequent order passed by the Customs Authorities on valuation of goods declared under the Customs Act, 1962. Therefore, we are of the considered view that the petition filed by the assessee for admission of additional grounds cannot be admitted at this stage

Summary

Issues Involved:
1. Transfer Pricing Grounds
2. Corporate Tax Grounds
3. Disallowance of Provision for Warranty
4. Disallowance of Pooja Expenses
5. Petition for Admission of Additional Grounds

Summary:

Transfer Pricing Grounds:

The appellant contested a downward adjustment of INR 30,114,249 to the value of international transactions. Key points included the rejection of Transfer Pricing (TP) documentation, non-application of multiple year data, and non-exclusion of foreign exchange loss from the cost base. The tribunal upheld the inclusion of Victor Gaskets India Limited, Banco Gaskets (India) Limited, and Minda Corporation Limited as comparables, rejecting the appellant's arguments for their exclusion. The tribunal also upheld the rejection of the appellant's TP documentation and the non-application of multiple year data, citing compliance with Rule 10B(4) of the Income Tax Rules, 1962. Furthermore, the tribunal agreed with the TPO/DRP that foreign exchange loss is operating in nature and should be included in the cost base. The tribunal also denied working capital adjustments, stating the appellant failed to provide necessary data and evidence. Lastly, the tribunal rejected the appellant's claim for customs duty adjustment due to a lack of evidence proving that non-cenvatable customs duty was not included in the cost of goods.

Corporate Tax Grounds:

The appellant challenged the disallowance of a provision for warranty expenses amounting to INR 1,41,29,858. The tribunal upheld the disallowance, noting that the provision was made on an estimated basis without scientific backing and was contingent in nature. The appellant's reliance on the Supreme Court decision in Rotork Controls India (P) Ltd vs ACIT was deemed inapplicable as the provision was not scientifically justified or crystallized.

Disallowance of Pooja Expenses:

The appellant contested the disallowance of pooja expenses amounting to INR 7,50,195. The tribunal remanded the issue back to the Assessing Officer for further verification, directing an examination of the claim in light of provided evidence, particularly regarding gift coupons issued to staff and workers as bonus.

Petition for Admission of Additional Grounds:

The appellant filed a petition to admit additional grounds related to benchmarking international transactions using customs valuation documents. The tribunal rejected the petition, stating the grounds were factual and not legal, and thus not admissible at this stage.

Conclusion:

The appeal was partly allowed for statistical purposes, with specific issues remanded for further verification. The tribunal upheld most of the TPO/DRP's findings, including the rejection of TP documentation, the inclusion of certain comparables, and the disallowance of warranty and pooja expenses. The petition for additional grounds was denied.