2022 (12) TMI 626 - AT - Income Tax

TP Adjustment - MAM selection - HELD THAT - As we direct the TPO to apply CUP as the MAM and recompute the ALP after giving the assessee a reasonable opportunity of being heard. Disallowance of provision for warranty - HELD THAT - We respectfully follow the decisions of the Co-ordinate Bench 2020 (3) TMI 471 - ITAT BANGALORE and hold that the provision for warranty is an allowable expenditure. MAT computation u/s 115JB - HELD THAT - Addition of provision for warranty to the book profits u/s 115JB is incidental. In view of the decision on the allowability of provision for warranty, this ground which is incidental, does not warrant any separate adjudication and hence dismissed. Disallowance u/s 37(1) of advertisement and business promotion expenses - HELD THAT - For the purpose of an expenditure to be claimed u/s 37(1), the expenses should not be capital in nature and should have been incurred wholly and exclusively for the purpose of business. Assessee has submitted various details, including the details of tax deducted at source, bank statement, etc., to substantiate that the expenditure towards advertisement expenditure is actually incurred and that the payments are made to the vendor, Mudhranna Creations. The fact that the vendor has wound up the operations is supported by the report from MCA website and that can be inferred as a reason for non-response from the vendor for the notice under section 133(6) which cannot be the only reason for disallowance, when other documents submitted by the assessee evidences the genuineness of the expenditure. We are, therefore, of the considered view that no disallowance is warranted for the advertisement expenditure incurred by the assessee, which is otherwise substantiated based on the various details submitted. This issue is allowed in favour of the assessee.

Issues Involved:

1. TP adjustment relating to the manufacturing segment.
2. TP adjustment on account of Advertising, Marketing & Promotion (AMP) expenses.
3. Disallowance of provision for warranty.
4. Addition of provision for warranty to book profits.
5. Disallowance of advertisement and business promotion expenditure.
6. Initiation of section 271(1)(c) of the Act.

Detailed Analysis:

1. TP Adjustment Relating to the Manufacturing Segment:

The taxpayer applied the internal CUP method for import of parts for manufacturing personal computers. The TPO rejected this method and applied the TNMM method, resulting in a TP adjustment of INR 12,57,27,686. The DRP gave partial relief, revising the adjustment to INR 10,88,68,102. The Tribunal, following its own decisions in earlier years, directed the TPO to apply CUP as the MAM and recompute the ALP after giving the assessee a reasonable opportunity of being heard.

2. TP Adjustment on Account of AMP Expenses:

The TPO treated the AMP expenditure as a separate international transaction and made a TP adjustment of INR 86,78,76,509. The DRP confirmed this adjustment. The Tribunal, following the decision in the assessee's own case for AY 2015-16, remitted the issue to the TPO for consideration of ALP of the trading segment using the net profit margin method. If the price received is found to be at arm's length, no separate addition needs to be made.

3. Disallowance of Provision for Warranty:

The assessee created a provision for warranty expenses of INR 1,97,19,70,205, which the AO disallowed to the extent of INR 6,66,86,868, concluding that the provision was not scientifically reliable. The Tribunal, following its own decisions in earlier years, held that the provision for warranty is an allowable expenditure, as it was created based on a scientific method and historical data.

4. Addition of Provision for Warranty to Book Profits:

This issue was considered incidental to the main issue of the allowability of the provision for warranty. As the provision for warranty was held to be allowable, this ground did not warrant separate adjudication and was dismissed.

5. Disallowance of Advertisement and Business Promotion Expenditure:

The AO disallowed the expenditure related to Mudhrana Creations Ind. Pvt. Ltd. due to non-response to a notice under section 133(6). The Tribunal held that the non-response from the vendor, who had wound up operations, cannot be the sole reason for disallowance when other documents submitted by the assessee evidenced the genuineness of the expenditure. The disallowance was thus not warranted.

6. Initiation of Section 271(1)(c) of the Act:

This issue was not separately adjudicated as it was incidental to the main grounds.

Conclusion:

The appeal of the assessee was partly allowed. The Tribunal directed the TPO to apply CUP as the MAM for the manufacturing segment and to reconsider the ALP of the trading segment using the net profit margin method for AMP expenses. The provision for warranty was held to be allowable, and the disallowance of advertisement expenditure was not warranted.

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