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TMI Blog2012 (12) TMI 1166X X X X Extracts X X X X X X X X Extracts X X X X ..... oods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentive was available to the assessee only after trading exports made by the assessee. Global Transfer Pricing policy of the group company mentions cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. In the Global Transfer Pricing Policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. The assessee who is involved in controlled transaction this approach actually results in transferring, benefit from Government granted incentives to AE. Moreover, the entities transfer pricing policy cannot override the basic fundamental of transfer pricing analysis. If assessee s method of calculation of cost of goods sold is followed, it would tantamount to a claim of benefit, which has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the assessee. But the Delhi Tribunal in assessee s own case for AY 2003-04 and 2004-05 upheld the order of the Ld. CIT (A) deleting the similar disallowance of expenditure out of repair and maintenance expenses for plant and machinery. We also note that Revenue has not filed any appeal before the High Court of Delhi against the aforesaid order passed by the Tribunal. Hence, we set aside the order of the AO and decide the issue in favour of the assessee. Claim towards provision for warranty - AO disallowed provision for warranty by holding that the said liability was an uncertain contingent liability - HELD THAT:- We agree with the assessee s contention that provision for estimated expenditure to be incurred for warranty obligation in respect of sales made in the relevant previous years is to be accounted as expenditure in the year of sale, in order to match the cost with revenue. The provision for warranty is necessarily required to be made by the companies which are required to follow mercantile system of accounting. In this regard, we further find that Courts have consistently held the view that liability for provision for warranty for replacement on account of manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 33,21,586 from the cost of goods sold for computing gross profit margin for determining the arm's length price. 2.2 That the assessing officer / TPO erred on facts and in law in holding that incentive received in respect of export of finished goods, should not be taken into account for determining the profit/cost in respect of the international transaction of export. 2.3 That the assessing officer / TPO erred on facts and in law in holding that the approach of the assessee in considering export incentive for computing cost of goods sold was in violation of its Global Transfer Pricing Policy. 2.4 That the assessing officer / TPO erred on facts and in law in holding that the export incentive does not form part of cost calculation while arriving at invoice price of goods sold and hence the same cannot be reduced from the cost of goods sold. 2.5 That the assessing officer I TPO erred on facts and in law in not reducing the rebate received of ₹ 33,21,586 while computing the cost of goods sold of the international transaction of export on the following grounds: (i) This item of rebate does not find a place III the financials accompanying the Transfer Pricing report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That on the facts and circumstances of the case the assessing officer ought to have allowed deduction for excise duty on closing stock amounting to ₹ 1,05,415 disallowed in the preceding previous year on payment in the relevant year as per the provisions of section 43B of the Act. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing. 3. Transfer Pricing Issue:- The assessee is a public limited company engaged in the business of manufacture and sale of automobile tyres, tubes and flaps in the brand name of 'Goodyear'. The assessee is a subsidiary company of Goodyear Tyre and Rubber Company (GTRC), USA. The assessee during the relevant previous year, inter-alia, entered into international transactions of export of finished goods to its associated enterprises of ₹ 32,65,88,813, comprising of export of manufactured products of ₹ 21,58,31,755 and export of traded products of ₹ 11,07,57,058. The assessee has purchased finished goods, viz., certain varieties of tyres from Good Year South Asia Tyres Pvt. Ltd. (GSATL) for export to the associated enterprises (AEs). The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should recover inventory cost and all applicable other costs plus the 5% profit mark-up. Accordingly, the inter company selling price may include other markup to cover other directly related expense such as general and administrative expense and research and development costs. The mark up for research and development costs should be 5% for all manufacturing entities. The mark up for general and administrative expense is to be limited to recovery expenses required to conduct inter company business. Generally this will include any SAG required to support the manufacturing facility, as well as expenses related to transporting and warehousing the product, if applicable, and expense necessary with regard to other inter-company transactions such as order processing and arranging for shipment. Expenses (for example; sales, collection or advertising expenses) not required to conduct inter-company business should not be include. The 5% mark up is to be applied to the sum of all costs and expenses discussed above. The following are specific directives that are to be used with transactions that are under the scope of this policy. (i) The intent of this policy is that the manufacturing Ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er purpose of export incentive is to earn the valuable foreign exchange for the country. That export incentives was available to the assessee only after trading exports made by the assessee. That the global transfer pricing policy of the group company talks about cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. That in none of the global transfer pricing policy, the future value of benefits which may be available in a few countries can be included as this will disturb the very basis/purpose of providing uniform return to each and every enterprise which is a member of global transfer pricing policy. TPO further observed the basic purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. That if a country provides tax incentives or other incentives to compensate its taxpayers on the basis of economic situation in that country, then this benefit is available only to the Indian taxpayers and the same cannot be transferred or traded to the other entity which is not located in India. These kinds of shifting of economic and tax incentives offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing policy. 8. TPO asked the assessee to provide information regarding gross margin earned on export of traded goods during the relevant financial year. The assessee provided the following details:- Net sales (Rs.) 110,757,058 Purchase Price (Rs.) 110,719,519 Export Incentive Benefit (Rs.) (7,872,603) Total Effective cost (Rs.) 102,846,916 Gross Margin (Rs.) 7,910,143 Gross Margin % 7.14% On the basis of above calculation, assessee submitted that even if export were not allowed, the transaction would be at arms length. The TPO asked the assessee to provide the details of cost base that had been employed to calculate the gross margin. Assessee submitted the following calculation:- Particulars Amount in Rs. Purchase price of goods 11,07,19,519 Less: Export incentives (78,72,603) Add: Freight cost 55,37,853 Less: Rebate / Discount received (33,21,586) Total Effective COGS 10,50,63,183 Add: 5% mark-up 52,53,159 Arm's length price of export sale of traded goods to group companies 11,03,16,342 Transfer price of export sales of traded goods to group companies 11,07,57,058 From the above, Assessing Officer observed that freight cost which had been omitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the following reasons:- "i) Export incentives are granted under the Import & Export Policy issued in terms of powers conferred under section 5 of the said Foreign Trade (Development & Regulation) Act, 1992. Chapter 7 of the Export Import Policy lays down various Duty Exemption and Duty Remission Schemes. DEPB Scheme is one of the Duty Remission Scheme given under the said Chapter 7 of the Export Import Policy. In order to promote exports from India, the Government has framed special schemes under which imports are permitted free of duty or at concessional rate of customs duty. The export incentive in the form of duty draw back scheme or DEPB credit entitles the exporter refund or credit against duty suffered by him in the cost of purchase either directly or indirectly, in respect of export turnover. Therefore, for the purpose of computing the correct profitability of export transactions, the export incentives received are required to be netted off from the cost of purchase. The profitability from the transaction of export may be presented in two alternative ways by netting or reducing the export incentive from the cost of purchase or can be shown separately as recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The TPO, clearly ignored the fact that the Global Transfer Pricing Policy of the group, Pg. 11 PB-1 provide for reducing the cost of merchandize exported by the export incentive available to TPO order the export entity, i.e. the appellant. (iii) It is a standard practice for exporters of goods to compute their profitability, by factoring in the export incentives received from the Government. It is also the industryOwise practice to determine cost of goods net of export incentive for the purpose of pricing/ profitability of such export. These export incentives could either be netted off from the costs (as in the case of the appellant), or alternatively, added to the income for computing the profitability of the export transactions. Further, it would be appreciated that in many cases, to gain entry into larger overseas markets and to be competitive therein, exporters have to operate on thin margins, in which case their selling price may not be very different from their cost of production/ purchase. The earnings of the exporters in such cases actually arise from the export benefits received, which enable them to carryon with their export businesses, and establish a presence! reach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government of India. The relevant extract of the said decision in this regard reads as under: "Observing in Para 21.3 of the impugned order that the following items while calculating the operating margins for comparison and determination of ALP be excluded: Particulars Amount in Rs. ('000) Provisions written back 7,916 Sales Tax/Service Tax refund 431 Notice Pay Recd! Fines & Penalties from staff 437 Membership & Subscription received 35 Other misc. income 12162 ..................... The taxpayer has submitted certain arguments while making similar claim in the general grounds relating to deduction u/s 8OHHC, Reliance in support of such claim has been placed on the decision of Hon'ble Bombay High Court in the case of Bangalore Clothing Company (Supra) wherein certain guidelines have been laid down to ascertain as to whether any item of other income represents operational income of the taxpayer. Applying the said guidelines, we have held that scrap sales, spare sales and provisions written back represent operational income of the taxpayer. Similarly, we are of the view that the receipts from damages for defective items, insurance claim and sales taxi se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year: Radhasoami Satsang vs. CIT: 193 ITR 321 (SC) CITvs. Neo Polypack (P) LId. : 245 ITR 492 (Del. CITvs. A.K.J. Security Printers: 264 ITR 276 (Del.) DIT(E) vs. Apparel Export Promotion Council: 244lTR 734 (Del.) Vesta Investment and Trading Co. (P) Ltd. vs. CIT: 70 ITD 200 (Chd.) NGC Network (India) P Ltd. ITA No. 5307/M/2008 Reliance in this regard is also placed on the recent decision of Pune Bench of Hon'ble Tribunal in the case of Brintons Carpets Asia P. Ltd. vs. DCIT [ITA No. 1296/Pune/10, wherein the Hon'ble Tribunal held, that, the rule of consistency is relevant to income tax matters and the assessing officer cannot ignore the same. There ought to be uniformity in treatment and consistency when the facts and circumstances are identical. Reliance is also placed on the recent decision of the Hon'ble Delhi Bench of Tribunal in the case of McCann Erickson India Pvt. Ltd. vs. Addl. CIT (ITA No. 5871/DeV2011), wherein, the Hon'ble Tribunal held that "although the principle of res judicata is not applicable to the income-tax proceedings, however, something material or adverse in nature, which is having direct bearing on the peculiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed from the premises of a company to the other company. In the Global Transfer Pricing Policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. If India provide tax incentive or other incentive to compensate its taxpayers on the basis of the economic situation, then this benefit is available to Indian taxpayers and the same cannot be transferred or traded to other entity which is not located in India. This kind of shifting of economic and tax incentives offered to local company will disturb the fiscal structure of a country and will result in shifting of profits from one tax jurisdiction to other tax jurisdiction. The economic and tax incentives offered to Indian entities are not meant to subsidize the entity in foreign jurisdiction. The assessee who is involved in controlled transaction this approach actually results in transferring, benefit from Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived amounting to ₹ 33,21,586/-, the TPO observed that the assessee in this regard has made the claim for the first time. Assessing Officer further observed as under:- (i) This item of rebate does not find a place in the financials accompanying the TP report. (ii) In the details forwarded by the Addl. C.I.T. (Transfer Pricing) Pune there is no reference to any rebate being allowed by M/s GSATL. (iii) The rebate claimed does not seem to appear anywhere in the audited financials of the assessee. (iv) The only conclusion that can be arrived at is that the issue / claim of rebate has been raised to offset the freight cost which has entered the cost base at this stage. For these reasons the claim of rebate shall not be allowed. 12.1 In this regard, we find that as per the agreement assessee is entitled for rebate of 3% on cost of goods purchased for exports to AE as well as to unrelated parties. We find that the above reasoning adopted by the Assessing Officer in disallowing the deduction is not cogent. That the assessee has not made any such claim initially cannot act as estoppel against the proper and valid claim. We agree with the ld. Counsel of the assessee company th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard were rejected by the DRP. DRP affirmed the order of the Assessing Officer and also held that the claim of depreciation on this capital expenditure was to be allowed. 14. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted as under:- "that the assessee had incurred expenditure on routine repair and maintenance of plant and machinery aggregating to ₹ 4,98,47,109 which included expenditure on account of consumables, stores and spares, etc., amounting to ₹ 2,14,95,075 issued from stores. The balance expenses were also incurred on annual maintenance services, purchase of consumables and spares, job works, etc., for the purpose of repair and maintenance of the existing plant. The TPO made disallowance of ₹ 99,64,422 being 20% of the total expenditure on the repairs holding the same to be capital expenditure. The details of the aforesaid expenditure on repair and maintenance of plant and machinery are placed at pages 132 to 160. The aforesaid expenditure did not result in an enduring benefit in the capital field nor were such expenses incurred for acquiring any capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles of accounting it should be allowed. However, Assessing Officer did not find this response acceptable. He held that assessee has not been able to prove the computation mechanism followed by the company for creating such provisions That being contingent in nature the provision for warranty was disallowed and added to the income of the assessee. 16. Assessee submitted its cross objection before the DRP. The DRP affirmed the action of the Assessing Officer in this regard. However, the DRP observed that the claim of the assessee that only ₹ 1870000/- has been charged to profit and loss account. Hence, the disallowance should be restricted to this amount, needs to be verified by the Assessing Officer. Assessing Officer was thus, directed to verify the contention of the assessee and restrict the disallowance to the amount as has been charged in profit and loss account in this regard. 17. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted as under:- "During the relevant assessment year, the appellant made provision for liability on account of claims for replacementwarranties associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mfrs (P) Ltd: 130 Taxman 400 (Madras) CIT v. Indian Transformers Ltd.: 270 ITR 259 (Ker.) Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd.: 222 ITR 697 Honda Siel Cars India Ltd. for the assessment years 2001-02 and 2002-03 (ITA Nos. 3688,3689/DeI/2005) (Delhi) Wipro GE Medical Systems Ltd. v. DCIT: 81 ITJ 455 (Bang.) Modi Olivetti Ltd. v. DCIT: (ITA NO. 2245/D/99)(Del.) JCIT v. Whirlpool India Ltd. : (ITA No. 1904/D/1999)(Del.) Jaybee Ind v. DCIT: 66 ITD 530 (Asr.) Majestic Auto Ltd. v. lAC: ITA NO.7/Chandi/88 (Chd.) ITO v. Wanson (India) Ltd.: 5 ITD 102 (Pune) Voltas India Ltd. : 64 ITD 232 (Born) DCIT v Samtel Color Ltd in ITA No 3966/D/96 (Del) In the case of the appellant, provision for warranty / obligation incurred pursuant to sale of finished products, viz., tyres to customers, has been made on rational and scientific estimate and the same being the liability incurred in respect of sales made during the relevant previous year which may involve outflow of resources, calls for being allowed as deduction in the relevant previous year." 17.1 Ld. Departmental Representative relied upon the order of the TPO and DRP. 17.2 On this iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43B of the I.T. Act. Therefore, the same should be allowed in this year. Assessing Officer observed that assessee has made similar request before the then Assessing Officer for giving relief u/s. 43B against the payment of excise duty of ₹ 105415/- in this year which was a part of the total amount of excise duty of ₹ 206646/- disallowed in A.Y. 2005-06. The Assessing Officer observed that the then Assessing Officer after proper verification of the assessee's claim has proposed disallowance of a sum of ₹ 38,369/- as the amount paid after the due date, as per the provision of section 43B of the I.T. Act. Assessing Officer held that for want of proper break-up and other details a sum of ₹ 38,369/- was paid as excise duty, after the due date, is again disallowed, as per the provisions of section 43B of the I.T. Act. 19. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted as under:- "The Assessing Officer in the assessment order passed for assessment year 2005-06 disallowed a sum of ₹ 2,06,646/- being amount of excise duty on closing stock which remained unpaid till the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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