2024 (12) TMI 29 - AT - Income Tax

Transfer pricing adjustment - UDS and CM are two distinct segments and cannot be combined for any TP adjustments and further that its overseas AEs being least complex are to be taken as its tested parties - TPO treated the UDS and CM as one composite segments and also proceeded to reject overseas AEs of assessee as tested parties and replace them with domestic entities to benchmark assessee international transactions. HELD THAT - Action of revenue in combining the UDS and CM sector as one integral activities for determination of ALP we find sufficient force in the arguments of lower authorities. Absence of separate manufacturing facilities, prior contracts for purchase of vehicles, disproportionate allocation of expenses etc goes on to allude that the arguments of the two being separate activities cannot be taken. On its part the assessee has not been able to convincingly place on records any evidences in support of its claims. Consequently, we are inclined to concur with the findings of the Ld. TPO duly supported by DRP. The order of Ld. DRP is therefore sustained. Accordingly, the ground by the assessee towards rejection of segmentation of UDS and CM segment is dismissed. Rejection of overseas AEs as tested parties - TPO is directed to rea-judicate the matter afresh on merits and in accordance with law after obtaining all necessary details required for his TP study, and after giving due opportunities of being heard to the assessee.TPO shall pass a speaking order on the subject. The assessee is directed to comply with all the notices issued by the revenue on this subject matter. Accordingly, the ground of appeal no.6 raised by the assessee qua rejection of overseas AEs is allowed for statistical purposes only. Upward adjustments towards brand development fees done by the Ld. TPO - As noted that the Hon ble coordinate Benches of this tribunal in the case of M/s. Nippon paint India Pvt Ltd 2017 (3) TMI 1162 - ITAT CHENNAI Hyundai Motor India Pvt Ltd 2017 (4) TMI 1193 - ITAT CHENNAI and others including assessee s own case for 2007-08 2013 (6) TMI 458 - ITAT CHENNAI have held that AMP spending s are not international transactions and deleted the impugned additions in respective cases. It has accordingly been concluded in decision in assessee s own case for 2007-08 Supra that any addition on this account would be unjustified. No change in facts qua those of AY-2007-08 has been brought to our notice. Accordingly in respectful compliance to the decision of the coordinate bench of this tribunal in assessee s own case for 2007-08, we set aside the order of lower authorities and direct the Ld. AO to delete the impugned addition. Accordingly ground of appeal no.8 is allowed. Selection of comparable companies for business processing service segment - Infosys Technologies Ltd, cannot be compared with the respondent assessee in 2015 (4) TMI 949 - DELHI HIGH COURT as seen from the financial data and it should be excluded from the list of comparables for the reason that it was a giant Company in the area of development of software . M/s HSCC India Ltd we find sufficient force in the argument that the company is bereft of any meritorious comparable given the same being a government company as well as one engaged in a totally different line of business. Accordingly we are of the view that the requested two companies cannot be included in the TP study by the TPO. We therefore deem it fit to restore the matter to the file of the Ld. TPO for recalculation of his adjustments after excluding M/s.Infosys BPO Ltd M/s HSCC India Ltd from his TP study. Advances received from customers towards extended warranty - HELD THAT - As per terms of contract, the extended warranty contract comes to force only after the completion of base warranty agreement. Naturally the extended warranty receipts taken during the year of sales would become income of the assessee, if any in the year when such warranty agreements becomes enforceable. At this stage it is also pertinent to point out that not all receipts received on account of extended warranty contracts would become income of the assessee even in the year when such warranty agreements becomes enforceable. Simply because only those components of extended warranty receipts would be income of the assessee which have not been claimed by the customers. The amounts received qua extended warranty contracts are akin to prepaid expenses for repairs of cars. Naturally assessee will deem only those amounts as its income in respect of which no claims arose by the customers. Wherever warranty claims were made by customers pointing out some defect in the car, the assessee would not be showing the same as its income. The amounts received on account of extended warranty by the assessee therefore would become its income only in the year in which such extended warranty contracts mature. Now as the assessee has already been offering the said amounts in the year of maturity of such contracts, there taxation in the year of sale of car would certainly tantamount to a case of double taxation. Accordingly, we are of the view that the amounts received by the assessee as advance from customers towards extended warranty and added by the Ld. AO was not required. Accordingly, Ld. AO is directed to delete the addition. The ground of appeal raised by the assessee is therefore allowed. Disallowance of provision for expenses reversed - HELD THAT - Admittedly, the assessee has not deducted TDS on certain receipts. We have also noted the observations of DRP regarding no claim having been made by the assessee qua some expenses in the return of income. We have also noted that the assessee has not provided details of TDS to the Ld. AO. As been noted that the Ld. AO also not clearly brought out in his order detailed bifurcation of the expenses as to viz expenses involving TDS deduction, those pertaining to last year and which were not claimed during the year etc. Be that as it may be we are of the view that ends of justice would be met if the matter is restored to the file of the AO for read judication after doing necessary verification. We set aside the order of lower authorities on this account and direct the Ld. AO to obtain all necessary details from the assessee and read judicate the matter by way of an speaking order after giving due opportunity of being heard. The assessee shall comply with all the notices of AO. Accordingly, ground is allowed for statistical purposes. Eligibility for claim of its unobserved depreciation allowed - AO is therefore directed to allow the same to the assessee.

Summary

Issues Involved:

1. Legality of Transfer Pricing Adjustments.
2. Rejection of Segmentation and Tested Party Approach.
3. Brand Development Fee Adjustments.
4. Selection of Comparable Companies for Business Processing Services.
5. Product Development Expenses.
6. Tax Treatment of Advances for Extended Warranty.
7. Disallowance of Foreign Currency Payments under Section 40(a)(i).
8. Deduction of Previous Year's Disallowance.
9. Set-off of Brought Forward Losses.
10. Initiation of Penalty Proceedings.

Detailed Analysis:

1. Legality of Transfer Pricing Adjustments:
The assessee challenged the adjustments made by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP) on the grounds that they were contrary to law and facts. The Tribunal found that the TPO's decision to combine different segments for transfer pricing purposes was justified due to the absence of separate manufacturing facilities and contracts, leading to the dismissal of the assessee's appeal on this issue.

2. Rejection of Segmentation and Tested Party Approach:
The Tribunal addressed the assessee's contention regarding the rejection of its segmentation approach and the selection of overseas Associated Enterprises (AEs) as tested parties. The Tribunal found merit in the assessee's argument that the TPO had not provided a sound basis for rejecting the overseas AEs as tested parties. Consequently, the Tribunal remanded the matter back to the TPO for a fresh decision, directing the TPO to consider all necessary details and provide a reasoned order.

3. Brand Development Fee Adjustments:
The Tribunal dealt with the issue of upward adjustments towards brand development fees. It noted that the TPO's reliance on the argument that AMP expenses constitute international transactions was not sustainable, as established by previous Tribunal decisions. The Tribunal directed the deletion of the addition, aligning with the decision in the assessee's own case for an earlier year.

4. Selection of Comparable Companies for Business Processing Services:
The Tribunal examined the selection of comparable companies for the Business Processing Services segment. It directed the TPO to include certain companies initially rejected and exclude others, such as Infosys BPO Ltd and HSCC India Ltd, due to lack of comparability. The Tribunal emphasized the need for a fresh calculation of adjustments, considering the revised set of comparables.

5. Product Development Expenses:
The Tribunal upheld the DRP's decision to restrict the downward adjustment of product development expenses, following the precedent set in the assessee's own case for a previous year. It recognized that both the assessee and its AE benefited from the expenses, justifying a partial adjustment.

6. Tax Treatment of Advances for Extended Warranty:
The Tribunal addressed the addition made by the AO concerning advances received for extended warranties. It concluded that such amounts should only be considered income in the year the warranty becomes enforceable, thereby avoiding double taxation. The Tribunal directed the deletion of the addition.

7. Disallowance of Foreign Currency Payments under Section 40(a)(i):
The Tribunal reviewed the disallowance of foreign currency payments due to non-deduction of TDS. It referred to previous Tribunal decisions in the assessee's own case, which had examined similar issues. The Tribunal confirmed certain disallowances while directing the AO to reconsider others in light of the Tribunal's previous rulings.

8. Deduction of Previous Year's Disallowance:
The Tribunal found merit in the assessee's argument for allowing the deduction of provisions reversed during the year. It remanded the matter to the AO for verification and a fresh decision, emphasizing the need for detailed examination of the expenses involved.

9. Set-off of Brought Forward Losses:
The Tribunal addressed the denial of set-off for brought forward unabsorbed depreciation. It relied on the decision of the Tribunal in the assessee's own case, which allowed such set-off without a time limit. The Tribunal directed the AO to permit the set-off of unabsorbed depreciation, aligning with the Tribunal's previous rulings.

10. Initiation of Penalty Proceedings:
The Tribunal dismissed the ground related to the initiation of penalty proceedings as premature, noting that it did not require specific adjudication at this stage.

In conclusion, the Tribunal provided a detailed analysis of each issue, directing revisions and remands where necessary, to ensure compliance with legal precedents and accurate determination of tax liabilities.