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2018 (12) TMI 691 - AT - Income TaxTP adjustment in respect of transacted price of royalty paid to associated enterprises - Held that - Assessee was engaged in the business of manufacture and sale of propeller shafts and light axles in the automotive industry segment. The assessee had entered into Technology Licensing Agreement with its associated enterprises AE Dana Corporation USA. Royalty was paid @ 2.85% of net sales by the assessee for the use of licensed technology in the manufacture of the said products pursuant to the renewal of the licensing agreement on 30.03.2007 for light axles and 14.06.2008 for propeller shafts, for a period of five years. The Transfer Pricing Officer (TPO) following earlier years, made the aforesaid upward adjustment in the hands of assessee, which was confirmed by Dispute Resolution Panel (DRP) and final assessment order was issued by the Assessing Officer, against which the assessee is in appeal. Disallowance of management fees - Held that - Since the issue has been covered in favour of assessee and there is no change in factual aspects, we find no merit in the orders of authorities below. Accordingly, we direct the Assessing Officer to delete the addition made on account of disallowance of management service fees. Disallowance of provision made for warranty - Held that - The issue raised in the present appeal is similar where the assessee is following systematic manner of creating provision for warranty and there is no change in factual aspects, hence, we find no merit in the orders of authorities below in not allowing the claim of assessee. Accordingly, we direct the Assessing Officer to delete the addition. Claim of deduction for employer s contribution to the employees superannuation and gratuity funds - Held that - We find merit in the plea of assessee since after respective trusts were created, the approval was sought from the Commissioner in time. However, the said approval was granted later but from retrospective effect. So, once the approval has been given by the Commissioner by passing orders in respect of Group Gratuity Fund and Employees Superannuation Fund, then contribution made by the assessee to the aforesaid funds is to be allowed in its hands as deduction. Accordingly, we hold so and direct the Assessing Officer to allow the same - Appeal of assessee is allowed.
Issues Involved:
1. Transfer Pricing (TP) adjustment concerning royalty payment. 2. Disallowance of fees for business support services termed management fees. 3. Disallowance of warranty provision. 4. Disallowance of employer’s contribution to employees' superannuation and gratuity funds. Issue-wise Detailed Analysis: 1. Transfer Pricing (TP) Adjustment: The primary issue raised by the assessee was against the TP adjustment of ?18,56,30,048/- concerning the royalty paid to its Associated Enterprise (AE). The assessee argued that the DRP and AO erred in confirming the upward adjustment to the Arm's Length Price (ALP) of the international transaction of royalty paid for the use of licensed technology, which had been determined at nil by the TPO. The assessee highlighted that similar issues in preceding assessment years (2009-10 to 2011-12) were resolved in its favor by the Tribunal. The Tribunal found merit in the assessee’s arguments, noting that the TPO and DRP had not followed their own precedents to keep the issue alive. Consequently, the Tribunal allowed the assessee’s claim, deleting the TP adjustment. 2. Disallowance of Management Fees: The second issue involved the disallowance of ?18,56,30,048/- paid as management fees for business support services. The assessee contended that the fees were paid for legitimate business needs under a Corporate Services Agreement. The Tribunal referred to its earlier decisions in the assessee's case for assessment years 2009-10 to 2011-12, where similar disallowances were deleted. The Tribunal reiterated that the expenditure incurred by the assessee for management fees was for the smooth running of its business and was allowable under commercial expediency principles. Therefore, the Tribunal directed the AO to delete the disallowance of management fees. 3. Disallowance of Warranty Provision: The third issue was the disallowance of a warranty provision amounting to ?56,00,000/-. The assessee argued that the provision was made based on past experience and technical assessments, and was a legitimate business expense. The Tribunal noted that similar issues were decided in favor of the assessee in the previous assessment year 2011-12, relying on the Supreme Court decision in Rotork Controls India P. Ltd. Vs. CIT. The Tribunal found no change in the factual aspects and directed the AO to delete the disallowance of the warranty provision. 4. Disallowance of Employer’s Contribution to Superannuation and Gratuity Funds: The final issue concerned the disallowance of the employer’s contribution of ?92,03,983/- to employees' superannuation and gratuity funds. The assessee had initially disallowed the contribution in its return as the funds were not approved at that time. However, the approval was later granted with retrospective effect. The Tribunal acknowledged that the approval was granted retrospectively and held that the contributions should be allowed as deductions. The Tribunal directed the AO to allow the employer's contribution to the approved funds. Conclusion: The Tribunal allowed the appeal of the assessee, directing the deletion of the TP adjustment, disallowance of management fees, warranty provision, and employer’s contribution to superannuation and gratuity funds. The decision was pronounced on December 11, 2018.
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