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2017 (3) TMI 1626 - ITAT PUNETransfer pricing adjustment - international transaction entered into by the assessee with its associate enterprises - benchmark of international transaction - MAM selection - TPO made adjustment after rejecting the claim of aggregation and also while applying the TNNM method had compared the same with internal comparables i.e. domestic sales made by the assessee - Held that:- Primary activity of assessee was to manufacture and sell IC engines and components both for domestic market and for exports, then the activity of importing engine parts and components, payment of royalty for getting know-how, provision of miscellaneous service i.e. procurement support services to the associate enterprises to help the sourcing of components, receipt of IT support services, design services and payment of technical know- how fees, etc. is closely linked to the export of manufactured IC engines. The principle of aggregation of closely linked transactions for undertaking benchmarking analysis applying TNNM method has been approved by the Hon'ble High Court of Delhi in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015 (3) TMI 580 - DELHI HIGH COURT]. Accordingly, we hold that for benchmarking international transactions, various activities undertaken by the assessee under the head 'manufacturing activities' need to be aggregated. The Assessing Officer / TPO is directed so. Difference in gross profit margins by AO as against difference in net profit margins between sales to associate enterprises and sales in domestic market - Held that:- The Tribunal in view of the detailed reasoning of CIT(A) observed that the addition made by the Assessing Officer on account of division of difference in gross profit margins by the Assessing Officer as against difference in net profit margins between sales to associate enterprises and sales in domestic market, no addition is warranted. The Tribunal decided the issue as per provisions of Rule 10A(d) of the Rules and deleted addition. Applying the said principle, we direct the Assessing Officer / TPO to re-compute the adjustment, if any, in the hands of assessee on account of international transactions. It may be pointed out herein itself that the adjustment was made in the hands of assessee in HHP Division only and no adjustment was made in LHP division. Perusal of details of administrative expenses reflects that certain expenses i.e. like depreciation, rent, rates, repairs & maintenance, taxes and other expenses have not been allocated at all to the export division, by the assessee. The assessee claims that depreciation and other expenses on plant & machinery were already included in the cost of goods sold and the non- allocation if any, does not affect cost. In the totality of the above said facts and circumstances, we find no merit in re-allocation of administrative expenses and selling & distribution expenses by the Assessing Officer / TPO. Methodology adopted by the TPO in application of net profit to cost as PLI - Held that:- We find merit in the plea of assessee in this regard that where the assessee is engaged in the manufacture of components and the main aim of undertaking was to sell the said components, then it is the sales which derive the profitability and not the cost of components. Accordingly, while determining the PLI, the TPO is directed to adopt net profit to sales in order to benchmark the international transactions. TPO ignoring interest received on extended credit while computing segmental profitability of exports to associate enterprises - Held that:- Since the same is linked to exports to associate enterprises, the same should be considered for ascertaining the segmental profitability of exports to associate enterprises. Benchmarking the receipt of commission from associate enterprises - Held that:- There is no merit in the adjustment made by the Assessing Officer / TPO in respect of international transactions relating to receipt of commission from associate enterprises. Accordingly, we direct the Assessing Officer to delete the same. See Tecnimont ICB (P.) Ltd. v. Asstt. CIT 2011 (2) TMI 107 - ITAT MUMBAI. Adjustment made under the head 'financing activity', wherein the assessee was in receipt of interest for extended credit period facility - Held that:- LIBOR + rates have to be applied to the amounts due from associate enterprises for the extended period of credit and the extended period of credit. The Assessing Officer is directed to follow our directions in iGATE Computer Systems Ltd. (2015 (5) TMI 970 - ITAT PUNE) to adjudicate the issue after affording reasonable opportunity to the assessee. Disallowance of incremental provision for New Engine Performance Inspection Fee (in short "NEPI Fee') - Held that:- the assessee was following a scientific basis for making the aforesaid provision which is not a contingent expenditure as the provision is made in relation to the IC Engines sold by the assessee. The assessee no doubt is making the provision and after the lapse of the period of inspection in case the expenditure has not been necessitated then the same is written back. In the totality of the above said facts and circumstances, we find merit in the plea of the assessee and allow the claim of the provision made for any NEPI fee. It may also be pointed out that the inspection and servicing is different from warranty which is to be taken care of in case of failure of the Engine or its Components during the period of warranty. Accordingly, we allow the claim of the assessee Disallowance of incremental warranty provision - Held that:- We find no merit in the stand of the authorities below in this regard wherein the assessee is following a scientific basis in claiming the said expenditure and as in the case of NEPI fee, the provision made by assessee is to be allowed as the amount is relatable to the IC Engines sold by the assessee. The warranty clause is part of the contractual obligations of the assessee and the same is an ascertained liability being determined on a scientific basis and hence the same is to be allowed as an expenditure in the hands of the assessee. Disallowance of expenses u/s.14A - Held that:- no disallowance out of interest expenditure is to be made in the hands of assessee as the assessee has sufficient funds and even otherwise the provisions of Rule 8D are not applicable to the instant assessment year. Now coming to the administrative expenses, following the precedent in assessee's own case, we restrict the disallowance to ₹ 2 lakhs. Re-working of deduction under section 80IB - Held that:- Even though the Daman unit was working independently, but there is merit in the orders of the authorities below in allocating the directors expenses and part of administrative expenses to the eligible industrial undertaking and re-work the deduction under section 80IB of the Act.
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