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TMI Blog2018 (4) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... as tested party is cost plus method. We fail to understand how the margins would be comparables in a Cost Plus Method, which is required for determining ALP of an international transaction. We also do not see any reason to set aside this issue to Ld.TPO, as assessee has categorically submitted before authorities below regarding non-availability of financial details of AE. Even before us Ld.AR did not submit there being a possibility of obtaining complete financial details of A.E. We therefore reject the arguments advanced by Ld.AR in respect of selecting AE as the tested party and CPM as MAM. Disallowance of provision for warranty claims - Held that:- Claim allowed as relying on assessee's own case [2017 (9) TMI 1157 - ITAT DELHI] wherein held hat the provision for warranty claim is an allowable expenditure. Disallowance of welfare expenditure under the head ‘miscellaneous expenditure’ - Held that:- The expenditure incurred by assessee is in the nature of corporate social responsibility which is considered to be an allowable expenditure subject to fulfilment of the conditions specified in section 32 to 36 of the Act. As assessee has not filed any details regarding these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Ld.TPO and Ld.AO regarding incorrect recomputation of the operating profit margin of the appellant. 2. Transfer Pricing Management Consultancy and Business Auxiliary Services (GSA charges). 2.1. On the facts and in law, based on the Hon ble DRP directions to verify compliance with the terms of Bilateral Advance Pricing Agreement ( APA ) signed between the appellant and CBDT, India in relation to the international transaction of payment of GSA charge, the Ld.TPO and Ld.AO erred in disallowing the amount of INR 57,778,305 (i.e. GSA charges in excess of 5% of net sales), even though the same is pending review and consultation between CBDT and Her Majesty s Revenue and Customs, UK as per clause 6.1 (5) of APA. 3. Disallowance of Provision for Warranty Claims. 3.1. On the facts and in the circumstances of the case and in law, the Ld.AO erred in making a disallowance of INR 13,708,513 relating to provision for warranty claims treating the same as contingent in nature. 3.2. The Ld.AO erred in observing that the amount of provision for warranty debited to the profit and loss account is notional and is not verifiable and ascertainable as per scientifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Hon'ble DRP erred in disregarding the judgment of Hon'ble jurisdictional Delhi High Court in the case of Holcim India Private Limited (ITA No. 486/2014) 6 Disallowance of welfare expenditure under the head Miscellaneous expenditure . 6.1 The Ld. A.O./ the Hon'ble DRP erred on the facts and in law, in disallowing INR 825,822 relating to expenditure incurred on welfare activities, which includes expenditure for welfare of families of employees. 6.2 The Ld. AO and the Hon'ble DRP further erred on the facts and in the circumstances of the case, in not appreciating the fact that the aforesaid expenditure was incurred by the assessee has helped establish its social image and therefore, is directly related to the business of the assessee. 7 Disallowance due to stock difference 7.1 The Ld. AO erred on the facts and in law, in disallowing INR 84,596,885 on account of actual physical loss of stock. 7.2 The Ld. AO and the Hon'ble DRP further erred on the facts and in law, in not appreciating that the loss of stock of ₹ 84,596,885 was incidental to the conduct of assessee's business and hence was an allowable deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost Plus Method (CPM) - - 2. Sale of finished goods 45,103,917 Transactional Net Margin Method (TNMM) 0.41% 13.26% 3. Royalty on Technical KnowHow 19,863,519 Comparable Uncontrolled Price Method (CUP) 5.7% 3% 4. Trademark SubLicense Fees 97,241,060 CUP 2% 0.5%- 1.5% 5. Management Consultancy and Business Auxiliary services 384,010,443 TNMM 8.34% 5% 6. Information System/Information Technology Service Recharge 14,248,822 - Do - -Do - - Do - 7. Fees for access to Driveline E mail 1,994,486 Other Method - - 8. Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected benchmarking adopted by assessee in case of purchase of raw materials and components and also selection of Associated Enterprise as the tested party. Instead Ld. TPO applied TNMM as most appropriate method and considered assessee to be the tested party, as assessee failed to provide complete financial details of Associated Enterprises for financial year ending March,2012. Ld.TPO after analysing the FAR of assessee observed as under: 1. Taxpayer had aggregated transactions from 1-9 and analysed these while serial no 10 was separately analysed. 2. TPO has pointed out that taxpayer in its form 3 CEB for FY 2010-11 had mentioned that for international transactions undertaken by GKN India and the AEs during 2010-11 relating to l,6,7,and 9 below it operated as a service provider and was remunerated on a cost plus basis and thus the AE was selected as the tested party. However since financial data of the AEs pertaining to transactions at 1,6, and 7 was not available with GKN India thus following the principle laid down in rule 1OC(2) of the Income Tax Rule 1962 GKN India was selected as the tested party and this year without any change of facts or business model, CPM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost Plus Method ('CPM') (using foreign AE as the tested party) and computation of ALP using TNMM (with assessee as the tested party) in compliance of Rule 1OB and Rule 1OC of the Income Tax Rules 1962. 9. Ld.DCIT accordingly passed order by making adjustment of ₹ 42,98,81,893/- in respect of the arm s length price declared by assessee on the international transaction relating to purchase of raw materials and components from AE s. Aggrieved by the adjustment made by Ld. DCIT, assessee is in appeal before us now. 10. Ground No.1 Ld.AR submitted that the observations by Ld.TPO are imaginary and devoid of facts. He placed reliance upon the reply dated 13/01/16 filed before Ld.TPO in response to the show cause notice dated 04/01/2016. 10.1 . Ld. AR submitted that assessee is a part of Driveshaft Division of GKN group s Automotive business segment. Ld. AR submitted that assessee purchased certain raw materials and components from its AE s for manufacturing constant velocity joint driveshaft automobiles. He submitted that it was priced at manufacturing cost plus average mark-up of 30.02% and in order to determine the arm s length price assessee derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be the one for which reliable comparables are easily found and available on the public domain; 10.6. As per OECD guidelines, by applying the most appropriate method, it is necessary to choose the party to the transaction for which a financial indicator is tested. The choice of tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner for which the most reliable comparables can be found, that this will most often be the one that has the least complex functional analysis. 10.7. From the OECD guidelines at paragraph 3.18,certain relevant principles emerge for the purposes of selecting tested party: (a) the choice of selecting tested party for compatibility is only available in CUP, TNMM. (b) The tested party should be the least complex party to the controlled transactions. (c) Availability of most reliable data of the tested party on the public domain and requirement of minimum adjustments is also one of the most important aspect while selecting the tested party. (d) FAR study of the tested party should be detaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench of this Tribunal, which was disregarded. 12.2. Aggrieved by the order of Ld.TPO assessee raised objection before DRP who directed Assessing Officer to verify the method of working of provision for warranty and directed that if the same is based on some scientific principles and ascertainable specifically the same should be allowed. It was submitted that as the matter was restored back to Ld. A.O., Ld. AO gave partial relief being the difference between provision for warranty and the claim that was raised during the year under consideration, being ₹ 1, 37, 08,513/-. 12.3. Aggrieved by the final order of Ld. AO, assessee is in appeal before us. He submitted that the issue has now attained finality by various orders of this Tribunal as well as Hon ble High Court. He placed reliance upon a recent decision of Coordinate Bench of this Tribunal in assessee s own case for assessment year 2010-11 and 2011-12 in ITA No. 1416/Del/2015 and ITA No. 843/del/2016 vide order dated 20/09/17 wherein this Tribunal held as under: 13. Ld. counsel for the assessee submitted that the Tribunal decided the issue in favour of assessee for assessment years 1995-96 and 1996-97 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income-tax Act, 1961. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. the principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iety for Development, Faridabad * Pranab Kanya Sangh, Faridabad 15.1 . It was submitted that these Institutions/Organisations were located within 5 to 10 km of factory premises which helped the workers of assessee. It was submitted that assessee accordingly had incurred these expenses wholly and exclusively for the purpose of its business and was allowable under section 37 of the Act. 15.2. Both Ld. TPO as well as DRP rejected the claim of assessee on the ground that assessee failed to establish along with evidence that the said expenses were incurred during the course of business operation and are related wholly and exclusively for the purposes of business. 15.3. Aggrieved by the order of Ld. AO in the final assessment assessee is in appeal before us now. Ld.AR placed reliance upon various judicial pronouncements which are as under: * Rajasthan Spg. And Wvg. Mills Ltd., 281 ITR 408 (Rajasthan HC) * India Radiators, 236 ITR 719 (Madras HC) * Mahindra and Mahindra Ltd., 261 ITR 501 (Bombay HC) * Aluminium Corporations, 86 ITR 11 (SC) 15.4. He submitted that these were to facilitate workers of assessee employed at factory and are allowable expenses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the action of Assessing Officer. 16.6 . Aggrieved by the order of Ld. AO in the final assessment assessee is in appeal before us. 16.7 . Ld.AR submitted that a Board Resolution has been passed in order to strengthen the internal external controls, and corrective measures have been adopted to identify mismatch of inventories. He thus submitted that these were genuine losses. 16.8. On the contrary Ld. CIT DR submitted that assessee has made up a story regarding the loss of stock. He submitted that had the stock been genuine, assessee would have definitely claimed insurance upon loss. He placed reliance upon specific observations of DRP wherein claim of assessee regarding reversal of CENVAT credit was negated on the basis of the documents reviewed by DRP. Ld. CIT DR submitted that these are bogus losses created by assessee and deserve to be disallowed. 17. We have perused the submissions advanced by both the sides in the light of the records placed before us. Ld.AR placed reliance on the following decisions : * Nainital Bank Ltd., 55 ITR 707 (SC) * Annamelia Chettiar, 86 ITR 607 (SC) * Motamal Jethumal, 15 ItR 155 (Patna HC) * Hiralal Ph ..... X X X X Extracts X X X X X X X X Extracts X X X X
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