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TMI Blog2018 (10) TMI 2033X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessee. We do not find any infirmity in the directions of DRP reversing the findings of AO in draft assessment order on this count. Accordingly, ground No. 1 raised in the appeal by Revenue is dismissed. Disallowance of warranty expenses - DR submitted that while making provision for warranty the assessee has failed to show that the provision was made on some scientific and systematic basis - HELD THAT:- The manner and the basis for making the provision in all the assessment years including the assessment year under appeal is identical. This fact has not been disputed by the Revenue. Therefore, we are of considered that the principle of consistency demands the provision created by the assessee for warranty deserves to be allowed. We further observe that the assessee has followed average of percentage of Free of Cost dispatches on sales made in past three years for creating provision for warranty. In addition the assessee has made provision for Rs.49 lacs towards warranty for supplies made to one of its major customer. The provision for warranty created by the assessee is based on well calculated scientific method. The assessee has made warranty provision in line with the princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 2011-12. The Revenue has filed cross appeal against the aforesaid order in ITA No. 515/PUN/2016. Since, the issues involved in all these appeals are identical and are arising from same set of facts, these appeals are taken up together for adjudication and are being disposed of vide this common order. ITA Nos.493 506/PUN/2015 (A.Y. 2010-11) 2. The Revenue has raised following grounds assailing the order of Commissioner of Income Tax (Appeals) : 1. Whether on the facts and on the law, the Ld. DRP was right in deleting the addition of Rs.45,00,000/- made by the A.O on account of disallowance out of Capital Cost Allocation of Rs.1,80,22,920/- ? 2. Whether on the facts and on the law, the Ld. DRP was right in deleting the addition of Rs.42,60,057/- made by way of disallowance of Warranty Expenses while relying upon the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs CIT (2009) 314 ITR 62 (Supreme Court) ? 3. The appellant craves leave to add, amend or alter any of the above grounds of appeal. 3. Shri Vishal Kalra appearing on behalf of the assessee submitted that the assessee had claimed deduction amounting to Rs.1,80,22,920/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or warranty. The assessee made a provision for warranty amounting to Rs.1,03,71,987/- in the assessment year 2010-11. The Assessing Officer in draft assessment order, disallowed Rs.42,60,057/- on the ground that the same is not based on any scientific method. The DRP deleted the said addition. The DRP held that the liabilities of the assessee towards warranties is not disputed. The assessee has followed average of percentage of Free of Cost dispatches on sales made in last three years. An additional provision of Rs.49 lacs was also made towards warranty for supply made to one of its major customer. The DRP rejected Assessing Officer s observation that the provision is not made on scientific basis. The ld. AR vehemently supported the findings of DRP and further substantiate its submissions by placing reliance on the following decisions: i. Rotork Controls India Pvt. Ltd. Vs. CIT, 314 ITR 62 (SC); ii. Calcutta Co. Ltd. Vs. CIT, 37 ITR 1 (SC); iii. Bharat Earth Movers Vs. CIT, 245 ITR 428 (SC). 4. On the other hand Shri Rajeev Kumar representing the Department submitted that from the details furnished by the assessee relating to corporate cost allocation as head wise expenses and allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. We do not find any infirmity in the directions of DRP reversing the findings of Assessing Officer in draft assessment order on this count. Accordingly, ground No. 1 raised in the appeal by Revenue is dismissed. 7. In ground No. 2 of the appeal, the Revenue has assailed deleting of provision for Warranty expenses Rs.42,60,057/-. The assessee is providing warranty on its product for the period ranging from 12 to 18 months. In assessment year 2010-11 the assessee made provision for warranty amounting to Rs.1,03,71,987/-, out of which the Assessing Officer disallowed Rs.42,60,057/- on the ground that the provision has not been created on scientific and systematic basis. The ld. AR has submitted that in the earlier assessment years and in the subsequent assessment years the provision for warranty made by assessee has not been disturbed. The manner and the basis for making the provision in all the assessment years including the assessment year under appeal is identical. This fact has not been disputed by the Revenue. Therefore, we are of considered that the principle of consistency demands the provision created by the assessee for warranty deserves to be allowed. We further observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further erred in alleging that the services received by the Appellant on account of 'corporate support services' and 'Eaton Business System' are similar in nature and the Appellant is making payments under two different nomenclatures for the services which are overlapping, which is contrary to the facts of the case. 5. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under sections 234B and 234C of the Act. 10. The ld. AR submitted that the primary grounds raised by the assessee in appeal is against transfer pricing adjustment in respect of international transactions pertaining to payments made to Associated Enterprises (AEs) for Corporate Support Services. The authorities below have erred in coming to the conclusion that the assessee has not received any services from AEs and hence, no benefit has been derived by the assessee from the alleged services. The ld. AR submitted that the assessee has furnished copies of the agreements entered into with AEs before the authorities below. The assessee had also furnished various other documents to substantiate the services received by assessee from its AEs in the impugned asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent dated September 1, 2005 with Eaton Corporation, US (Refer pages 319 to 335 of the paperbook). In terms of the Agreement, the Assessee received corporate support services from Eaton Corporation, US, the nature of which is detailed at Annexure A to the agreement placed at pages 331 and 332 of the paperbook. The Assessee, during the year under consideration, paid INR 10,39,210 for receipt of such services from Eaton Corporation, US. 3.7 Eaton China and Eaton Corporation have computed the service charges by including a mark-up of 5% and 8% on total costs respectively, in accordance with the agreements. The CSS charges are consistently applied by the AEs to all the participating entities. 3.8 The Assessee allocated the expenses incurred in respect of receipt of corporate support services from its AE's to manufacturing and trading segment and for the purposes of benchmarking the subject transaction aggregated the portion of payments in respect of corporate support services attributable to the manufacturing segment with the manufacturing segment and portion of payments in respect of corporate support services attributable to the trading segment with the trading segment by applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment should be deleted following the decision in Assessee's own case for assessment year 2008-09. 11. On the other hand ld. DR vehemently supported the order of DRP/Assessing Officer in respect of transfer pricing adjustment arising from payments made to the AEs in lieu of alleged corporate support services. However, the ld. DR fairly admitted that the issue raised in ground Nos. 2 to 4 of the appeal for assessment year 2010-11 are similar to the one already adjudicated by the Tribunal in assessee s own case in assessment year 2008-09. 12. Both sides heard. Orders of the authorities below perused. The ground No. 1 of the appeal is general in nature, hence, requires no adjudication. 13. The ground Nos. 2 to 4 of the appeal relate to transfer pricing adjustment amounting to Rs.1,23,36,988/- with respect to international transaction of Corporate Support Services received by assessee from its AE s. The authorities below have raised doubt over the receipt of services and the benefit derived from such services. The assessee in order to substantiate receipt of services has furnished various documents which inter alia include the agreements with AEs, E-mails indicating rendering of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO cannot sit in the judgment of business module of assessee and its intention to avail or not to avail any services from its associated enterprises. The role of TPO is to determine the arm's length price of international transactions undertaken by the assessee and whether the same is at arm's length price when compared with similar transactions undertaken by external entities or internal comparables. We have already addressed similar issue in Emerson Climate Technologies (India) Limited Vs. DCIT in ITA No.2182/PUN/2013, relating to assessment year 2009-10 and in ITA No.211/PUN/2015, relating to assessment year 2010-11, order dated 29.12.2017 and observed as under:- 17. We have heard the rival contentions and perused the record. The assessee was 100% subsidiary of Copeland Corporation, USA. The assessee was earlier a company incorporated under the Companies Act and was joint venture of 51:49 between Kirloskar Brother Ltd. (KBL) and Copeland Corporation. M/s. KBL exited the joint venture in June, 2006 and the assessee became wholly owned subsidiary of Copeland Corporation. Post-exit of KBL, there was need to provide operational, strategic and advisory support to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived for Blue Star for its Middle East markets 597 598 Sharing of key data related to competitors such as Mitsubishi 565 566 Sharing of key data related to competitors such as Sanyo 583 584 Assistance in implementation of performance management system for employees of ECT India, identifying the training needs, etc 621 622 Access to regional / global information in respect of suppliers, commodities updates etc 539 546 Solutions obtained for critical issues such as unionizations issues with labour, legal cases pending in court, union wages proposals, high attrition rates, e-hiring deployment, etc. 613 628 19. The assessee thus, filed documentary evidence to demonstrate that it had availed services in the field of Human Resources, Marking and Product, Finance, Business Development and Management and other services i.e. support for new product, marketing material, training material and technical support. The assessee has also explained the need for services being in field of operational, strategic and advisory support services. The first aspect which arises in the present appeal is whether the TPO while ascertaining whether price paid for the services is at arm's length price or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for providing services, wherein a particular formula is designed by the person providing the services i.e. the basis for remuneration is the cost incurred by way of man hours charged to the entity with mark up of 5.8%. Such method of charging and remunerating was identical in the case of all the entities which were availing the services from Copeland Corporation through Emerson HK and Emerson TH. The assessee had also furnished on record the basis for charging cost by the two entities from the assessee. No doubt, the complete details of operations of the said concerns worldwide had not been filed, but that had no relevance to the activities or services availed by the assessee. There is no merit in the order of TPO in rejecting the segmental details of AEs filed by the assessee vis- -vis services availed by it. What is to be considered in the hands of assessee is the services it had availed from Emerson HK and Emerson TH and not the whole activities undertaken by the said two concerns worldwide. The assessee had put on record that not only the assessee but many other concerns were availing same services from the two entities and even the basis for remuneration to the said concerns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO that services were not rendered by the group companies to assessee was negated by the Tribunal. 23. The next stand of the TPO is two-fold; as to what benefits have been received by the assessee against the said support services and intricacy value of services given by the associated enterprises. The said aspect is linked to the issue of whether there is any need for services and in the absence of its establishing the same, whether the TPO / Assessing Officer is correct in determining the arm's length price of transactions at Nil. The assessee had entered into an agreement with its associated enterprises for availing the services because of business benefits arising from such an understanding. Law does not require the assessee to demonstrate the need for availing the services. The assessee is best person to arrange its affairs to conduct the business in the manner it wants and Revenue cannot step into the shoes of businessman to decide what is necessary for the businessman and what is not. The TPO is not empowered to question the decision of assessee to avail support services from the associated enterprises. The decision taken by the assessee in the course of carrying on its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id business carried on by the assessee and hence, we find merit in the plea of assessee in aggregating the same with other international transactions undertaken by the assessee with its associated enterprises. Accordingly, we hold so. In any case, the assessee in the reasons for filing additional evidence has pointed out that information was filed before the TPO along with agreement and certificate of Eaton China, but thereafter, no other query was raised by TPO or any clarification was sought in respect of information technology services availed. The assessee thus, was under the bonafide belief that the documents and explanation furnished by it has been accepted. Further, the assessee before us has pointed out that though it is filing additional evidence but because of confidentiality clause, such information cannot be shared as it would affect the business transactions of assessee. We have gone through the additional evidence filed by the assessee and we are of the view that the assessee has established its case of availment of said services in the field of information technology. In addition, the assessee has also filed certificate from its associated enterprise dated 22.04.2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the TPO after rejecting comparables selected by the assessee to come up with other comparables so as to justify the reduction of royalty payments. Further, no such exercise was undertaken by the TPO and by going into whys and wherefores of the improvement in the net sales and profits of assessee, the TPO held that there was no justification for payment of royalty @ 3% to associated enterprises by the assessee. The Hon ble High Court held This reasoning is without legal basis of law as it is not for the TPO to decide the best business strategy for the assessee. The Hon ble High Court also held that This whimsical fixation by the TPO amounts to an arbitrary and unbridled exercise of power. Thus, the order of Tribunal rejecting the case of TPO was upheld by the Hon ble High Court. 34. The Hon ble Bombay High Court in CIT Vs. M/s. Kodak India Pvt. Ltd. (supra) interpreted the provisions of section 92B(2) of the Act. The facts of the case as noted by the Hon ble Bombay High Court were as under:- 3. The respondent assessee is an Indian subsidiary of M/s. Eastman Kodak Co. USA (EKC). During the previous year relevant to the assessment year the respondent assessee sold its imaging bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue. 36. In the facts of the case before the Hon ble High Court of Bombay in CIT Vs. M/s. Lever India Exports Ltd. (supra), the TPO while evaluating the transactions between the parties held that the same were on principal to principal basis and no reimbursement of advertisement expenses by the respondent assessee to its associated enterprises could be allowed. Consequently, he determined the arm's length price at Nil by virtue of disallowing the expenditure. The Hon ble High Court in such circumstances observed as under:- 7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions undertaken by the assessee during the year and the same has to be benchmarked applying internal TNMM method as in the case of other international transactions. Further, we also reverse the order of TPO in holding that the assessee has not availed any services in view of various documents filed by the assessee and also certificate of Eaton China, which was filed during the course of TP proceedings evidencing not only the availment of services but also the basis of cost for such services. Similar services were availed by other Eaton group entities from Eaton China and its certificate that the same has also charged at the same rates as charged to the assessee. In the entirety of the above said facts and circumstances, we reverse the order of TPO / Assessing Officer in taking the value of international transactions of Information Technology Services availed at Nil and delete the adjustment made. Allowing the claim of assessee, the ground of appeal No.8 raised by the assessee is thus, allowed. 14. The ld. DR has not able to controvert the findings of Co-ordinate Bench. No contrary decision has been brought to our notice by the Revenue on similar issue. It is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to AEs for receipt of CSS, alleging that the Appellant had failed to furnish any supporting evidence/documents to establish the receipt of services and commensurate benefits realized thereof, without appreciating the submissions/evidence furnished by the Appellant in support of the said claim. 5. That on the facts and circumstances of the case and in laws, the TPO has erred in equating the payments made to Eaton Technology Pvt. Ltd. ( ETPL ) with payment for CSS. The TPO further erred in alleging that services received by the Appellant on account of CSS and costs paid to other AEs are similar in nature and thereby wrongly concluding the ALP of the international transaction as Nil . 6. That on the facts and circumstances of the case and in law, the AO has erred in levying interest under sections 234B and 234C of the Act. 18. The ld. AR submitted that the issue raised by the assessee in appeal for assessment year 2011-12 is identical to the one raised in assessment year 2010-11. Therefore, the submissions made for assessment year 2010-11 would hold good for assessment year 2011-12 as well. 19. The ld. DR concurred with the fact that the issue raised by assessee in appeal for assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether on the facts and circumstances of the case, the DRP was justified in directing the AO /TPO to recomputed TP adjustment by considering the margin of AE segment and not the overall margin of the entire manufacturing activity without appreciating the fact that no separate profitability of transactions with AE and transactions with non AE is available and assessee has determined profitability by applying certain allocation keys which is not accurate and reliable? 3. Whether on the facts and circumstances of the case, the DRP was justified in directing that proportionate adjustment is required to be made to arrive at the net margin of the international transaction without appreciating the fact that no separate profitability of transactions with AE and transactions with non AE is available and assessee has determined profitability by applying certain allocation keys which is not accurate and reliable? 4. Whether on the facts and circumstances of the case, the DRP was correct in not appreciating the fact that in absence of any authentic and reliable data there arises practical difficulty in computing Working Capital Adjustment? 5. Whether on the facts and circumstances of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that similar issue had come before the Co-ordinate Bench of the Tribunal in assessment year 2007-08. The Tribunal upheld internal TNMM as the most appropriate method for manufacturing segment by observing as under : 12. We have carefully considered the rival submissions. The dispute on this aspect relates to a plea put-forth by the assessee during the course of the proceedings before the TPO whereby assessee canvassed that the international transactions in the Manufacturing segment be benchmarked by using internal TNM Method. No doubt, in the Transfer Pricing Study carried out by the assessee initially it had adopted the external comparability on an aggregated segment of Manufacturing plus Trading activities. The TPO had rejected the aggregation of the two activities and benchmarked the Manufacturing segment independent of the Trading segment. At that stage, assessee put-forth a plea that the benchmarking of the Manufacturing segment be carried out by using the internal TNM Method. Before the TPO, assessee pointed out that in the Manufacturing segment, the products manufactured by assessee consumed various raw materials and components, which were procured domestically from third pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed conditions, i.e. with third parties. In the present case, assessee pointed out that the associated enterprises segment and the third parties segment were functionally comparable and therefore the third parties segment was a good uncontrolled comparable available to benchmark the international transactions entered with the associated enterprises. 14. Pertinently, assessee also undertook similar analysis with regard to its Trading segment before the TPO. In the Trading segment also, assessee tabulated the associated enterprises segment and the third parties segment and pointed out that the operating margin in the associated enterprises segment was higher than the operating margin in the third parties segment. The said calculation is a part of the Tabulation furnished to the TPO, a copy of which has been placed in the Paper Book at page 114. This approach of the assessee was similar to the approach in relation to the Manufacturing segment as discussed earlier. In so far as the international transactions entered with the associated enterprises in the Trading segment are concerned, the TPO was satisfied that they are at an arm's length price as no adjustment has been proposed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns pertaining to manufacturing segment. 15. The aforesaid shows that the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment was done by the assessee on product basis, i.e. the associated enterprises segment reflect profitability on products which require consumption of raw material and components from associated enterprises whereas the Third parties segment reflects profitability from products which do not entail purchases of raw materials and components from associated enterprises. The TPO has pointed out that the sale of finished goods in the associated enterprises segment includes a component of sale of Rs.8,37,000/- of products which do not consume any raw material or component purchased from associated enterprises. The assessee had explained that this was a minor transaction involving Gear pumps Cylinders out of total sales of finished goods to associated enterprises of Rs.2.36 crores (approx). It was explained that profitability of this minor transaction was included in the associated enterprises segment to ensure comprehensive benchmarking of international transaction of sales to the associated enterprises. In our considered o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has not been controverted by the TPO, we find that in the present case internal comparison of the operating margins using internal TNM Method is liable to be upheld in order to compute arm's length for the international transactions of purchase of raw material and components from associated enterprises as well as sales of finished goods effected to the associated enterprises. On the basis of the aforesaid benchmarking, the profitability of international transactions under the associated enterprises segment computed at 3.25% is higher than the profitability of transactions under the Third parties segment computed at 2.80%. Hence, the international transactions entered with the associated enterprises under the Manufacturing segment on account of purchase of raw material and components and also sales are consistent with the arm's length price and no transfer pricing adjustment is thus required to be made. On this aspect, we uphold the plea of the assessee and accordingly, the Ground of Appeal No.2 raised by the assessee is allowed. 30. The ld. DR has failed to controvert the findings of Co-ordinate Bench in assessee s own case in assessment year 2007-08. We find that identi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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