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TMI Blog2016 (3) TMI 826X X X X Extracts X X X X X X X X Extracts X X X X ..... nty disallowed - Held that:- While it is true that assessee had a present obligation on account of warranty resulting out of its sales and it was also probable that there could be an outflow of resources for settling such obligation, the third condition, viz., making of a reliable estimate has not been done by the assessee. In our opinion, unless and until scientific data is produced by an assessee in support of the estimate of warranty provisioning, an estimate cannot be presumed as a reliable one. Assessee having failed to do so, disallowance was rightly done by the lower authorities. We do not find any reason to interfere - Decided against assessee Expenditure paid to the Registrar of Companies for increasing authorised capital disallowed - Held that:- It is clear that once the type of expenditure mentioned under subsection (2) is incurred by an assessee, it shall be allowed a deduction as per sub-section (1) in the manner specified therein. Thus it is clear that AO when he had made disallowance of the share issue expenditure in the nature of fees paid to Registrar of Companies for increasing authorised capital, he ought to have allowed the amortisation of such expenditure u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ₹ 19,61,28,232 instead of ₹ 1 7,71,37,313/-. 03. Facts apropos are that assessee trading in generator parts and servicing of generators had filed its return of income for the impugned assessment year declaring nil income. Assessee had during the relevant previous year entered into international transactions with its Associated Enterprise ( AE in short) mainly consisting of purchase of finished goods. Assessee had two segments of operation, namely, distribution and power. AE from which assessee bought the finished goods for sale in India was its principal, namely, Kohler Company USA. Finished goods were bath fittings and sanitaryware products. International transactions undertaken by the assessee during the relevant previous year with its AE were as under: SI No Particulars Amount (Rs.) 1 Purchase of Finished goods(Distribution) 19,61,28,232 2 Purchase of Finished goods(power) 1,05,40,487 3 Purchase of fixed assets 2,99,096 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material effect on the gross profit. As per the TPO, it was not possible to ascertain the material differences that might be there, considering the manner in which assessee had carried on its business and the manner in which independent enterprises chosen by the assessee had carried on their business. Hence, according to him adjustment as required under the above mentioned Rule was not possible. As per the TPO, assessee was not a mere reseller which performed simple services like that of a forwarding agent. Assessee had a good marketing net work and had also spent substantial money for advertisement and selling expenditure. TPO noted that accounting treatment of the assessee and the comparable companies selected by it, with respect to direct expenditure was not available in public domain. He thus held that the RPM adopted by the assessee could not be considered as the most appropriate method ( MAM in short). He substituted such method with TNMM and proceeded with the computation of ALP. For this, he took Euro Merchandise (India) Ltd, which was one of the comparable selected by assessee itself in its RPM based TP study. As per the TPO, the said Euro Merchandise (India) Ltd was hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similar items were sold by its competitors in India like, Parryware, Hindware etc., As per the Ld. AR, lower authorities took a wrong presumption that advertisement and selling expenditure resulted in a value addition to the goods sold. Goods sold were not subjected to any value addition by the assessee. Ld. AR submitted that in a similar situation this Tribunal in the case of DCIT v. M/s. Sanyo India P. Ltd v. ACIT [(2015) 45 CCH 0098 Bang-Trib], held that RPM was the best one for testing the international transactions relating to sale of goods purchased from AE, as such. Reliance was also placed on the judgment of Bombay High Court in the case of CIT v. L oreal India P. Ltd [(2015) 117 DTR 0460]. According to the Ld. AR, substantial expenditure were incurred on advertisement and marketing since this was the second year of its operation in India, but this did not make any value addition to the products which were sold, in the same state in which it was imported. 09. Per contra, Ld. DR strongly supporting the orders of the authorities below, submitted that assessee could not show how TNMM was not the appropriate method when the comparable company considered both by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be possible to come to a conclusion whether RPM can be applied or not. RPM depends on a mechanism of verification of margins at gross levels and not at net levels. This is obvious from Rule 10B(1)(b) of the Act, which is reproduced hereunder : 10B. Determination of arm s length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a) ..... (b) resale price method, by which- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified ; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ; (iii) the price so arrived at is further red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e s ALP, whatever may be the MAM finally selected by him. Ground 3 of the assessee is treated as partly allowed for statistical purpose. 12. Vide its ground 4, assessee is aggrieved that provision of warranty of ₹ 50,78,903/- was disallowed. Facts apropos are that assessee was required to provide details of the provisioning made on warranty during the course of assessment proceedings. Reply of the assessee was that faucets sold by it and used for residential purpose had a warranty of seven years and those for commercial purpose had a warranty of five years. For kitchen and bath fittings there was a warranty of one to ten years. AO refused to consider the claim of the assessee. In the draft assessment order he was of the opinion that the claim of warranty provision was in the nature of contingent liability. However when the matter reached the DRP it directed the AO to have a relook at the provisioning for warranty considering the judgment of Hon ble Apex Court in the case of Rotork Controls India (Pvt) Ltd vs CIT [(2009) 314 ITR 62]. 13. Assessee pursuant to the directions of the DRP gave details of the warranty period with reference to various types of products sold by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Apex Court in the case of Rotork Controls India (Pvt) Ltd (supra), for allowing a claim of warranty as under : a) An enterprise has a present obligation as a result of a past event. b) It is probable that an outflow of resources will be required to settle the obligation. c) A reliable estimate can be made of the amount of obligation. 17. While it is true that assessee had a present obligation on account of warranty resulting out of its sales and it was also probable that there could be an outflow of resources for settling such obligation, the third condition, viz., making of a reliable estimate has not been done by the assessee. In our opinion, unless and until scientific data is produced by an assessee in support of the estimate of warranty provisioning, an estimate cannot be presumed as a reliable one. Assessee having failed to do so, disallowance was rightly done by the lower authorities. We do not find any reason to interfere. Ground 4 of the assessee stands dismissed. 18. Vide its ground 5, assessee is aggrieved that expenditure of ₹ 81,90,000/- paid to the Registrar of Companies for increasing authorised capital was disallowed. 19. Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board; (b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee; (c) where the assessee is a company, also expenditure- (i) by way of legal charges for drafting, the Memorandum and Articles of Association of the company; (ii) on printing of the Memorandum and Articles of Association; (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956); (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; (d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provisio ..... 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