2022 (12) TMI 424 - AT - Income Tax

TP adjustment - international transactions pertaining to payments made to Associated Enterprises for receipt of Headquarter services on the ground that same were not at arm s length price - AO as well as DRP disallowed management fees paid to AE on the ground that the assessee could not prove rendering of services and benefit derived from service rendered by AE to justify payment of management fees - HELD THAT - We find that except certain flow chart showing various corporate services of enterprises, the assessee could not file any evidence to justify rendering of services to justify management fee paid to sister concern. Although, the assessee has filed certain e-mail communication between the assessee and sister concern, but nothing is available from such e-mail correspondence to ascertain whether AE has rendered certain services. It is well settled principle of law by the decisions of various courts that the onus is on the assessee to bring all material facts on record to substantiate its claim, when the claim is made towards any expenditure. Further, mere production of vouchers in support of claim for deduction of expenditure would not prove claim made by the assessee is allowable. In this case, except routine flow chart explaining certain services of corporate entity, no other evidence has been placed on record to justify claim of payment of management fee. Therefore, we are of the considered view that that there is no error in the reasons given by the AO as well as DRP to sustain disallowance of management fee paid to sister concern. Hence, we are inclined to uphold findings of the DRP and reject ground taken by the assesse. Appeal filed by the assessee is partly allowed for statistical purposes. Additions made towards provision for warranty - As argued assessee is claiming deduction for warranty expenses only on the basis of provision created in books of account, but whatever deduction claimed in the statement of total income is over and above provision made in the books of account - HELD THAT - We find that arguments of the learned counsel for the assessee is fallacious, because as per details filed by the assessee towards historical amounts of provision created for warranty expenses and actual utilization, which is available as filed by the assessee for the financial year 2010-11, the assessee has unutilized provision for warranty, including opening balance brought forward from earlier financial year is about 9.55 crores, whereas actual utilization for warranty expenses for the financial year 2010-11 is Rs.3.20 crores, leaving behind closing balance of provision for warranty expenses - From the above, it is very clear that the assessee has claimed excessive deduction of provision for warranty expenses, although, it has incurred less amount for providing warranty to its customers. We are of the considered view that there is no error in reasons given by the Assessing Officer to disallow provision for warranty expenses by allowing actual expenditure incurred towards warranty expenses. The learned DRP deleted additions made by the AO on different grounds without appreciating reasons given by the Assessing Officer to disallow excess provision made for warranty expenses. Hence, we reverse findings of the DRP and uphold additions made by the Assessing Officer towards disallowance of provision for warranty expenses - Appeal filed by the Revenue is allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment for payments made to Associated Enterprises (AEs) for Headquarter services.
2. Disallowance of management fees paid to AE under Section 37(1) of the Income Tax Act, 1961.
3. Deletion of additions made towards provision for warranty expenses.

Detailed Analysis:

1. Transfer Pricing Adjustment for Payments Made to AEs for Headquarter Services:
The first issue pertains to the transfer pricing adjustment of Rs. 3,67,52,455/- for payments made to AEs for Headquarter services, deemed not at arm's length price. The assessee, a domestic company and 100% subsidiary of Eaton Corporation, USA, engaged in trading UPS and Direct Current power systems, had entered into various international transactions, including payments for Headquarter services. The Transfer Pricing Officer (TPO) found that the assessee failed to substantiate these payments with necessary evidence, except for some email correspondence, leading to an upward adjustment. The assessee argued that services were availed under a Shared Services agreement and benchmarked transactions under TNMM with OP/sales as the profit level indicator. However, the TPO and DRP rejected these claims due to insufficient evidence.

Upon review, the Tribunal noted that similar issues in earlier assessment years were remanded to the TPO/AO for determining the ALP of payments for shared services. Therefore, the Tribunal decided to remand the issue back to the TPO for re-examination in light of the agreements and evidence provided by the assessee.

2. Disallowance of Management Fees Paid to AE under Section 37(1) of the Income Tax Act, 1961:
The second issue concerns the disallowance of Rs. 1,62,04,532/- management fees paid to AE, Eaton Technologies Pvt. Ltd., under Section 37(1). The Assessing Officer disallowed this amount, citing a lack of evidence for services rendered by the AE. The assessee claimed these fees for various services, including human resources, audit, finance, statutory compliance, legal support, and corporate communication. However, the Tribunal found that the assessee failed to provide substantial evidence beyond a flow chart and some email correspondence to justify the payment. The Tribunal upheld the disallowance, emphasizing that the onus is on the assessee to substantiate claims with material facts, and mere production of vouchers is insufficient.

3. Deletion of Additions Made Towards Provision for Warranty Expenses:
The third issue involves the deletion of additions towards provision for warranty expenses. The assessee, following the accrual system of accounting, made provisions for warranty expenses based on past experience and claimed deductions for both the provision and actual expenses incurred. The Assessing Officer disallowed the provision, arguing that the assessee should have added back the actual expenses in the computation. The DRP deleted the addition, but the Tribunal reversed this decision. The Tribunal noted that the assessee's practice of claiming deductions for both provision and actual expenses led to excessive deductions and was inconsistent with the method followed in earlier years. The Tribunal upheld the Assessing Officer's disallowance of the provision for warranty expenses, allowing only the actual expenses incurred.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, remanding the transfer pricing issue back to the TPO for re-examination. The appeal filed by the Revenue was allowed, reinstating the disallowance of provision for warranty expenses. The Tribunal emphasized the necessity for substantial evidence to support claims for deductions and adjustments, aligning with legal and accounting principles.