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2017 (6) TMI 67 - AT - Income TaxProvision for warranty expenses - Held that - Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision in assessee s own cases for the assessment years 2000-01, 2001-02, 2002-03, and year 2004-05. Learned Departmental Representative, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon ble jurisdictional High Court has declined to admit the appeal on this issue and the matter has thus attained finality. Disallowing provision for expenses - Held that - So far as the amount of ₹ 92,444 is concerned, there cannot be any dispute about the genuineness of the provision to this extent, as the related payment has indeed been made, in respect of the expenses of that year, in the subsequent year. We, therefore, deem it and proper to allow the provision to this extent. The alternate plea of the assessee is thus upheld. In any case, learned counsel for the assessee did not have much to say in support of the basic plea either inasmuch as no scientific basis, for quantification of provision, was furnished. Allowability of expenditure - prior period expenses - Held that - There is an inherent fallacy in the stand of the Assessing Officer inasmuch as in the event of assessee s being able to make a provision for these expenses in the preceding year, the amount would have been claimed as a deduction in the preceding year, and not in the current year, yet the Assessing Officer has declined the deduction on the ground that the provision was not made in the preceding year. In any case, as we have noted, while dealing with the earlier grounds of appeal, this is a peculiar case in which the accounts are finalized within 10 days of the annual closing, so as to facilitate consolidation of accounts by the US based parent company, leading to practical problems with respect to creation of adequate provisions on the basis of cogent material. We have also noted that the assessee had presented a copy of the ledger account to the AO which showed that the expenses were actually incurred in October 2005. The incurring of expenses, or its bonafides, are thus not really in doubt. In these circumstances, in our considered view, the disallowance of ₹ 97,286 was not really called for. We, therefore, direct the Assessing Officer to delete this disallowance Denying the claim in respect of the carry forward of Long Term Capital Loss and setting it off against exempt Long Term Capital Gains - Held that - As relying on case of GK. Ramamurthy. Versus Joint Commissioner Of Income-tax 2010 (2) TMI 28 - ITAT BOMBAY-G we uphold the plea of the assessee. The action of the Assessing Officer on this point is reversed, and the set off of loss carried forward as thrust by the Assessing Officer, is vacated. Adjustment of international transaction of sales made to the Associated Enterprises - Held that - Just because the assessee has sold the same product, as exported to the AEs, to the domestic enterprises, CPM method cannot be applied. That is precisely what the TPO has done. There is no other objection taken by the authorities below. There is a difference in geographical location of the market as also in the value chain and utility of the product. It is also important to bear in mind that while the products sold by the assessee to the AEs are propriety products, having unique specifications which non AEs cannot obtain from others, the assessee is in a position to fetch higher prices for the same from non-AEs. The action of the TPO, in imposing internal CPM by comparing margins on sale to AEs and non-AEs, cannot thus be justified. The benchmarking, on TNMM basis as a corroborative measure, also justifies this conclusion.In view of all these factors, and as sales to the AEs and non-AEs, which belong to different class of markets, cannot be compared on the peculiar facts of this case, the assessee is indeed justified in its plea. We uphold the same and direct the Assessing Officer to delete the impugned ALP adjustment ALP adjustment relating to payment of Royalty - Held that - Whether or not the higher ceiling of rates, per se, prescribed by the RBI for payment of royalty can be accepted as an arm s length price may possibly have different approaches to this issue, there can be no dispute that there is a difference in approach to the rates of royalties in respect of domestic sales and exports. This commercial reality is duly recognized and accepted by the regulatory framework in India. In any case, even if one is to ignore this reality it for a minute, what is being used as a valid CUP input is an intra AE transaction, which a parent subsidiary transaction inherently is. Even in a case in which the royalty is being given to a rank outsider, by the virtue of 92A(2)(g), the entities paying and receiving royalties become AEs. It is only elementary that a transaction between the AEs can never be a valid CUP input.What the TPO has adopted to be an ALP is essentially on the basis of intra AE transactions but in the scheme of CUP analysis such an approach is not permissible. The approach adopted by the authorities below is thus wholly devoid of legally sustainable merits. There is no other justification for the impugned ALP adjustment. In any case, in the assessment year 2006-07, these royalty payments have been held to be arm s length payments by the DRP and that matter rests there. In view of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee. The Assessing Officer is, accordingly, directed to delete the impugned ALP adjustment. Thus we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance TDS u/s 195 - non deduction of tds - payment of commission to non residents - Held that - As the recipient of the commission did not have any tax liability in respect of income embedded in such payments and as liability under section 195 can come into play only when the recipient has a tax liability in respect of income embedded in the related payments, the assessee cannot be faulted for not having deducted tax at source, and, disallowance under section 40(a)(i) does not, therefore, come into play.
Issues Involved:
1. Disallowance of provision for warranty expenses. 2. Disallowance of provision for expenses. 3. Disallowance of prior period expenses. 4. Denial of carry forward of long-term capital loss. 5. Adjustment of international transaction of sales to Associated Enterprises (AEs). 6. Adjustment of international transaction relating to payment of royalty. 7. Disallowance of commission expenses paid to non-residents. Issue-wise Detailed Analysis: 1. Disallowance of Provision for Warranty Expenses: The assessee's grievance was regarding the disallowance of provision for warranty expenses of ?1,52,18,826. The representatives agreed that this issue was covered in favor of the assessee by previous decisions of the ITAT in the assessee's own cases for earlier years. The Tribunal, following these judicial precedents, directed the Assessing Officer to delete the disallowance, providing relief to the assessee. 2. Disallowance of Provision for Expenses: The assessee contested the disallowance of ?5,00,000 towards provision for expenses. The Assessing Officer had disallowed this amount, considering it contingent in nature. The Tribunal allowed the provision to the extent of ?92,444, which was actually paid in the subsequent year, but upheld the disallowance for the remaining amount, as no scientific basis for quantification was provided. 3. Disallowance of Prior Period Expenses: The assessee challenged the disallowance of ?97,286 related to prior period expenses. The Tribunal found that the expenses were genuinely incurred in the preceding year but not accounted for due to practical difficulties in finalizing accounts within a short period. The Tribunal directed the Assessing Officer to delete the disallowance, recognizing the bona fide nature of the expenses. 4. Denial of Carry Forward of Long-Term Capital Loss: The assessee's claim for carrying forward a long-term capital loss of ?11,66,067 was denied by the Assessing Officer, who argued that the loss should have been set off against exempt long-term capital gains. The Tribunal, referencing a decision in G K Ramamurthy Vs JCIT, held that exempt income does not enter the computation of total income and thus cannot be set off against the capital loss. The Tribunal directed the Assessing Officer to allow the carry forward of the loss. 5. Adjustment of International Transaction of Sales to AEs: The assessee disputed an ALP adjustment of ?2,31,92,365 on sales to AEs. The Tribunal found that the transactions with AEs and non-AEs were not comparable due to differences in market conditions and the nature of transactions. The Tribunal directed the deletion of the ALP adjustment, noting that the TPO's approach was not justified. 6. Adjustment of International Transaction Relating to Payment of Royalty: The assessee contested an ALP adjustment of ?82,87,963 related to royalty payments. The Tribunal held that the difference in royalty rates for domestic and export sales was recognized by regulatory authorities and that the TPO's reliance on intra-AE transactions was not permissible. The Tribunal directed the deletion of the ALP adjustment, providing relief to the assessee. 7. Disallowance of Commission Expenses Paid to Non-Residents: The assessee challenged the disallowance of ?20,04,492 paid as commission to non-residents. The Tribunal, referencing a series of decisions, held that the commission income did not accrue or arise in India as no business operations were carried out in India by the non-residents. Consequently, the assessee was not required to deduct tax at source, and the Tribunal directed the deletion of the disallowance. Conclusion: The Tribunal provided relief to the assessee on several grounds, including the deletion of disallowances related to warranty expenses, prior period expenses, and commission payments to non-residents. The Tribunal also directed the deletion of ALP adjustments related to sales to AEs and royalty payments, recognizing the regulatory framework and commercial realities. The appeals were partly allowed in favor of the assessee.
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