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2021 (9) TMI 12 - AT - Income TaxDeduction of Provision made towards long service benefit liability - Crystalization and Accrual of expenses - scientific basis for creating a provision - Application of Accounting Standard 15 - AO disallowed the provision stating that such liability has neither crystallized nor accrued during the year and there was no contractual obligation on the assessee and such amount constituted loyalty bonus subject to section 192 at the time of actual payment - HELD THAT - Taking into account the judicial pronouncements and the AS-15, we hold that if the liability is an known liability and the estimation of liability is reliable, the provision made for the relevant assessment year cannot be stated to be a contingent liability - if the assessee had made a provision on proportionate basis, i.e., taking into account 10% on an year to year basis for gifting the memento on completion of 10 years of service, we could have understood the valuation report is based on some reasonable basis - when the employee leaves the assessee-company prior to completion of ten years, how the provision is reduced on year to year basis, is also not explained. Before us, no explanation was offered as regards how the provision of ₹ 46,60,033 is arrived at. - the assessee has to prove before the A.O. the scientific basis for creating a provision - Ground restored to the files of the A.O. with the above directions. Allowable business expenditure or not - addition u/s. 37 being the expenditure related to construction of school at Bidadi, promotion of Japanese language and construction of basic civil structure for water purification plant at Ramanagaram - HELD THAT - Majority of the expenses incurred by the assessee is incurred in villages very near to assessee's manufacturing plant. It is the claim of the assessee that the workers and their family has benefitted from the above expenditure. This fact has also accepted by the CIT(A) by allowing as deduction 10% of the total expenditure - Amount expended for promotion of Japanese language will also ultimately benefit the employees of the assessee. Taking the overall view and to put a quietus to the issue, we hold that 30% of the total expenditure would have benefitted the employees of the assessee-company. Restatement of the hedging transaction - Allowable revenue expenditure or not - interest rate fluctuation risk and foreign exchange fluctuation risk - HELD THAT - This claim of the assessee is not mandated as per the judgment of the Hon'ble Supreme Court relied on by the A.O. as well as the provisions of the Income-tax Act. As rightly pointed out by the CIT(A), the A.O. had in letter and spirit followed the judgment of the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT reiterated in the case of Oil and Natural Gas Corporation Ltd. v. CIT 2010 (3) TMI 81 - SUPREME COURT and in the case of CIT v. Maruti Udyog Limited 2009 (10) TMI 42 - SUPREME COURT - underlying reason for availing the foreign loans are for purchase of plant and machinery, which is admittedly is on the capital front and cannot be allowed as a revenue expenditure - Decided against assessee. TP Adjustment - comparable selection - inclusion of Tata Motors Limited and Maruti Suzuki India Limited - deselectio of comparables having RTP in excess of 25% - HELD THAT - There is nothing on record to suggest how RPT ratio has been calculated for all the comparable companies. RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales. The said position was adopted by the Revenue in the past years. In this regard, the TPOs order in assessee's own case for assessment year 2007-2008 has been placed on record - RPT ratio has been calculated taking both RPT income transactions plus RPT expenses transactions on aggregate basis - It is not clear how RPT ratio has been calculated for Tata Motors Limited vis- -vis other comparable companies. Therefore, this issue is restored to the files of the A.O. The A.O. is directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata Motors Ltd. and Maruti Suzuki India Limited. Provision Written back - Operating in Nature - assessee had written back provision that was no longer required same was credited to the profit and loss account - While computing the margin, the assessee treated the same as operating in nature and treated the same as non-operating in nature - HELD THAT - The assessee has reversed the provision which were no longer required. In the year of creation of this provision, the same were treated as operating in nature and reversal of the same should also be treated as operating in nature. This view has been consistently held by the judicial pronouncements relied by the CIT(A). Working capital adjustment - HELD THAT - The working capital adjustment is an accepted adjustment - we hold that the CIT(A) is justified in directing the AO to grant working capital adjustment. TP adjustment should be restricted to AEs transactions - HELD THAT - We hold that the CIT(A) has correctly directed the AO/TPO to restrict the TP adjustment to the AEs transaction. Royalty Benchmarking - assessee had adopted TNMM at the entity level in which process royalty payment is considered as closely linked transaction and part of operating cost - TPO rejected the above stand of the assessee and benchmarked the royalty transaction as per the ALP computation of assessment year 2012-2013 - HELD THAT - We are of the view that once the net profit margin is tested on touchstone of arm's length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length. In taking the above view, we rely on the order of the ITAT in assessee's own case for assessment year 2007-2008 2015 (3) TMI 304 - ITAT BANGALORE wherein the Tribunal had held that the royalty payment made by the assessee are at arm's length price - we hold that the CIT(A) was correct in partly allowing the assessee's ground by holding that the TPO has to follow a consistent approach and adopt net sales as denominator for the purpose of comparable royalty in the case of comparables and the assessee.
Issues Involved:
1. Disallowance of provision towards employee long-term service benefit liability. 2. Disallowance of expenses incurred towards construction of school building, installation of water purification plant, and promotion of Japanese language. 3. Disallowance of mark-to-market (MTM) loss on outstanding derivative contracts. 4. Exclusion of Tata Motors Limited as a comparable in Transfer Pricing (TP) analysis. 5. Treatment of provisions written back as operating in nature. 6. Granting of working capital adjustment. 7. Restriction of TP adjustment to Associated Enterprises (AEs) transactions. 8. Benchmarking of royalty transactions. Issue-wise Detailed Analysis: 1. Disallowance of Provision towards Employee Long-Term Service Benefit Liability: The assessee claimed a deduction for a provision towards long service benefit liability amounting to ?46,60,033, which the Assessing Officer (AO) disallowed on the grounds that the liability had neither crystallized nor accrued during the year. The CIT(A) upheld the AO's decision, stating that the liability accrues only when the employee completes ten years of service. The Tribunal, however, noted that the provision was made in compliance with Accounting Standard (AS) - 15 and based on an actuary valuation report. The Tribunal directed the AO to verify the scientific basis for the provision and restored the issue to the AO for further examination. 2. Disallowance of Expenses Incurred towards Construction of School Building, Installation of Water Purification Plant, and Promotion of Japanese Language: The AO disallowed ?73,91,476 incurred for these purposes, stating they were not for the benefit of the business. The CIT(A) allowed 10% of the expenses as a deduction, considering the benefit to the assessee's employees. The Tribunal increased this allowance to 30%, recognizing that the majority of the expenses benefitted the employees and improved the brand image of Toyota. 3. Disallowance of MTM Loss on Outstanding Derivative Contracts: The AO disallowed the MTM loss of ?1,76,80,000, treating it as a notional loss and speculative in nature. The CIT(A) confirmed this view. The Tribunal upheld the CIT(A)'s decision, noting that the unrealized loss due to foreign exchange fluctuation on loans taken for revenue purposes had been allowed, but the restatement of the hedging transaction was not allowable as revenue expenditure. 4. Exclusion of Tata Motors Limited as a Comparable in TP Analysis: The CIT(A) directed the exclusion of Tata Motors Limited from the list of comparables due to its related party transactions (RPT) exceeding 25% of sales. The Tribunal restored the issue to the AO, directing the calculation of RPT ratio on an aggregate basis for all comparables, including Tata Motors Limited. 5. Treatment of Provisions Written Back as Operating in Nature: The TPO treated the reversal of provisions amounting to ?18.48 crore as non-operating in nature. The CIT(A) and the Tribunal held that since the provisions were treated as operating in nature when created, their reversal should also be treated as operating in nature. 6. Granting of Working Capital Adjustment: The CIT(A) directed the AO to provide for both positive and negative working capital adjustments. The Tribunal upheld this decision, citing judicial pronouncements that support the provision of working capital adjustment for better comparability. 7. Restriction of TP Adjustment to AEs Transactions: The CIT(A) directed the TPO to restrict the TP adjustment to transactions with AEs alone. The Tribunal upheld this decision, referencing judicial pronouncements and the Tribunal's own decision in the assessee's case for the assessment year 2003-2004. 8. Benchmarking of Royalty Transactions: The TPO benchmarked the royalty transaction separately, while the assessee had included it as part of operating costs under TNMM at the entity level. The CIT(A) directed the TPO to adopt net sales as the denominator for comparing royalty in the case of comparables and the assessee. The Tribunal upheld this decision, relying on judicial pronouncements and the Tribunal's previous decision in the assessee's case for the assessment year 2007-2008. Conclusion: The appeals filed by both the Revenue and the assessee were partly allowed for statistical purposes, with specific directions issued for further examination and recalculations by the AO.
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