2024 (10) TMI 872 - HC - Income Tax

Disallowance on account of royalty paid by the assessee to the AEs - these companies are the ultimate users of the intangibles in the form of licensed patents and know-how provided for manufacturing of licensed products - HELD THAT - Tribunal concluded that MBIL and CTTL were manufacturing sub-contractors and the assessee had been granted the license for use of the license patents, license know-how, and license trademarks. The assessee was also entitled to get the products manufactured through sub-contractors. The Tribunal also observed that it was not the Revenue s case that MBIL and CTTL had paid royalty to Sony Corporation, Japan for manufacturing their products and using the licensed patents, know-how and trademarks. The said finding of fact is not controverted. We are unable to accept that any question of law arises regarding disallowance on account of royalty paid by the assessee to the AEs. It is not disputed that the learned TPO is not required to examine the efficacy of commercial transactions and its role is confined to determining the price or value of the transactions on an arm s length basis. We find no infirmity with the conclusion of the Tribunal. Valuation of closing stock - assessee had valued its opening stock and closing stock on the basis of cost or net realisable value, whichever is low - AO had faulted the assessee from valuing the stock at a value lower than the cost - HELD THAT - There is no dispute that the assessee had been consistently valuing its stock both opening stock and closing stock on the basis of cost or realisable value, whichever is lower. The aforesaid basis is well accepted for valuation of stock. The said basis was also noted in Woodword Governor India (P.) Ltd. 2009 (4) TMI 4 - SUPREME COURT Revenue also does not dispute that if the aforesaid basis is followed consistently, the assessee s income for the year would be fully captured as the element of profit would also not be included in the opening stock. The finding of the Tribunal cannot be faulted. Clearly, no substantial question of law arises from the decision of the Tribunal to delete the addition made on account of the valuation of closing stock. Excess provision for claims against warranties - HELD THAT -Although, the AO had attempted to distinguish the facts obtaining in earlier years, it is apparent that the AO had failed to do so. As noted the method adopted by the assessee to make a provision for warranties was examined in any detail and therefore, the AO s premise that it was unscientific one is clearly not sustainable. In our view, no substantial question of law arises with regard to the decision of the learned Tribunal in directing deletion of the addition made by the AO on account of the provision for warranties. Expenses on CSR for the purposes of calculating book profits and determining the tax payable under Section 115JB - Tribunal had found that there was no provision u/s 115 JB of the Act, which required the expenditure on CSR to be adjusted for arriving at book profits - HELD THAT - We find no reason why expenditure incurred on CSR be excluded from the final accounts. Revenue has also not provided any basis for excluding the expenditure on CSR for determining book profits. We find no infirmity with the decision of the Tribunal in rejecting the AO s adjustment of expenditure on CSR for determining the book profits under Section 115JB of the Act. Clearly, no substantial question of law arises in this regard as well.

Summary

Issues Involved:

1. Deletion of adjustment on account of royalty paid by the assessee for products manufactured by OEMs.
2. Addition on account of valuation of closing stock.
3. Addition due to excess provision for warranty.
4. Addition of CSR expense for determining book profits under Section 115JB of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Payment of Royalty:

The core issue was whether the royalty paid by the assessee to its associated enterprises (AEs) was justified when the manufacturing was outsourced to original equipment manufacturers (OEMs). The Transfer Pricing Officer (TPO) had benchmarked the royalty payment at Nil, arguing that since the products were manufactured by OEMs, no royalty was payable by the assessee. However, the Tribunal found that the assessee had obtained licenses for using intangible properties from Sony Corporation, Japan, and that these licenses justified the royalty payments. The Tribunal emphasized that the TPO's role was to determine the arm's length price, not to question the commercial expediency of the transactions. The Tribunal referred to the decision in Commissioner of Income Tax-I v. M/s Cushman and Wakefield (India) Pvt. Ltd., which supported the view that the TPO should not disregard commercial agreements. Consequently, the Tribunal's decision to delete the adjustment on royalty was upheld, as no substantial question of law was found to arise.

2. Valuation of Closing Stock:

The Tribunal addressed the addition made by the Assessing Officer (AO) concerning the valuation of closing stock. The AO had objected to the stock being valued at less than the cost. However, the Tribunal found that the assessee consistently followed Accounting Standard AS-2, valuing stock at cost or net realizable value, whichever was lower. This method is well-accepted, as affirmed by the Supreme Court in CIT v. Woodword Governor India (P.) Ltd. The Tribunal concluded that the consistent application of this method did not distort the assessee's income. Thus, the Tribunal's decision to delete the addition on account of stock valuation was upheld, with no substantial question of law arising.

3. Excess Provisions for Warranty:

The AO had disallowed a portion of the provision for warranties, deeming it excessive. The Tribunal, however, found that the assessee's method of provisioning was based on past experience and was consistent with previous years. The Tribunal noted that the AO had not conducted a detailed examination of the methodology used by the assessee for calculating warranty provisions. The Tribunal relied on the precedent set in Commissioner of Income Tax v. M/s Sony India (P) Ltd., where warranty provisions were considered allowable deductions. The Tribunal's decision to delete the addition for excess warranty provisions was upheld, as the AO's conclusions were deemed arbitrary without a detailed examination.

4. Expenditure on CSR:

The AO had added the CSR expenditure to the book profits for tax calculation under Section 115JB. The Tribunal found no provision in Section 115JB requiring such an adjustment. It emphasized that book profits should be determined based on accounts maintained according to generally accepted accounting principles. The Tribunal's decision to exclude CSR expenditure from adjustments for book profits was upheld, as no substantial question of law was found.

Conclusion:

The appeal was dismissed as no substantial questions of law arose from the Tribunal's decisions on any of the issues. The Tribunal's findings on royalty payments, stock valuation, warranty provisions, and CSR expenditure were upheld, affirming the assessee's approach in each case.