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M/s. Kohler India Corp. P. Ltd Versus Deputy Commissioner of Income-tax, Circle -11 (5) , Bangalore

2016 (3) TMI 826 - ITAT BANGALORE

Transfer pricing adjustment - MAM selected - whether RPM can be rejected as MAM? - Held that:- Before rejecting the RPM, TPO should have made an analysis to see whether the required data regarding the set of comparables dealing in similar products could be obtained from public data bases. Only if it can be shown that the adjustment specified in the above Rule was not possible, RPM can be rejected as MAM. In he present case assessee was selling kitchen and bath fittings, and whether there were ot .....

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the file of TPO / AO for consideration afresh - Warranty 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 pr .....

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er 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/s.35D(1) of the Act. DRP had accepted this claim of the assessee at para 10.2 of its order. We therefore direct the AO to grant amortisation of such expenditure to the assessee as specified u/s.35D of the Act - I.T(TP).A No.1660/Bang/2012 - .....

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which, grounds 1 and 2 are general in nature needing no specific adjudication. Ground 6 is consequential in nature assailing initiation of penalty proceedings u/s.271(1)(c) of the Act. 02. Ground.3 of the assessee is reproduced here under: 3. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/Ld. DRP erred while making an addition of ₹ 19,61,28,232 to the value of international transactions by: (i) rejecting Resale Price Method ("RPM") and selecting Trans .....

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rroneously increasing the transfer pricing adjustment by ₹ 2,20,43,542; (v) wrongly including the provision for warranty of ₹ 50,78,903 and fees of ₹ 81,90,00 paid to the Registrar of Companies in the cost base for arriving at the operating profit margin of the Appellant under TNMM even when the aforesaid provision and fee were disallowed as allowable expenditure u/s 37 by the Ld. AO; (vi) not conducting a fresh benchmarking analysis while applying the TNMM as most appropriate .....

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ished 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, .....

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d to him by the AO. However, with regard to the distribution segment, TPO did not accept the TP documentation filed by the assessee. Assessee had followed Resale Price Method ( RPM in short) for justifying the ALP of the purchase cost of goods from its AE abroad. As per the assessee it was selling the products imported from its AE in India as such and there was no value addition. Kitchen, bath and sanitary ware products, similar to the ones dealt with by the assessee, were imported and sold by o .....

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it was having exclusive right to sell Kohler kitchen and bath fittings in India, this did not result in a monopoly situation since there were similar products of various brands like Parryware, Hindware and Jaquar, sold by other competing, independent companies. In other words as per the assessee when items similar to that which were sold by it were also sold by unrelated parties in independent transactions, RPM was the best method which could be adopted for testing its international transactions .....

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er 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 .....

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.72%. Applying 17.72% as arms length TP margin, TPO recommended an upward adjustment of ₹ 19,61,28,232/-, u/s.92CA of the Act on the international transactions of the assessee. 06. When a draft assessment order on the lines mentioned above was proposed, assessee chose to move the DRP. Primary objection of the assessee before the DRP was on the rejection of RPM as the MAM and adopting TNMM in its place. Relying on Rule 10C(1) and (2) of the Rules, assessee argued before the DRP that the met .....

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7; 9,73,20,890/- for establishing show-room, advertisement and business promotion. Further as per the assessee, expenditure incurred by it was of a nature which effected the net profit and hence application of TNNM would not give fair results. Contention of the assessee was that selling prices were not related to the cost incurred by it, but was determined by market forces. Or other words, by prices of similar products sold by competitors. Assessee also submitted that it was only in its second y .....

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ders of authorities below submitted that in the first year of its operation also assessee had followed RPM in its TP study for international transactions in the power and distribution segment. As per the Ld. AR, assessee was selling kitchen, sanitary and bath fittings in India, directly importing it from its AE abroad. Assessee was not doing any processing of these items. Similar items were sold by its competitors in India like, Parryware, Hindware etc., As per the Ld. AR, lower authorities took .....

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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 appro .....

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nalysis done by the TPO in the said case used both RPM and TNMM. As per the Ld. DR, when adjustments which would bring the prices charged by the tested party on the same footing as the prices charged by the comparables, could not be carried out with reasonable accuracy, RPM could not be accepted. As per the Ld. DR, in such a situation TNMM was more appropriate. Thus as per the Ld. DR lower authorities were justified in adopting TNMM in place of RPM considered by the assessee. 10. We have perused .....

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keting and administrative expenditure coming to ₹ 9,73,20,890/-. This resulted in a loss to the assessee in its distribution segment during the relevant year. For justifying the pricing of its international transactions under this segment assessee had selected as comparable Euro Merchandise (India) Ltd, under the RPM. TPO though he rejected the RPM and adopted TNMM as MAM, had also considered the very same comparable. Nevertheless, TPO in our opinion, ought have made a close analysis of th .....

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lusion 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 followi .....

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ces, in a comparable uncontrolled transaction, or a number of such transactions ; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the e .....

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s could be obtained from public data bases. Only if it can be shown that the adjustment specified in the above Rule was not possible, RPM can be rejected as MAM. No doubt Ld. AR placed reliance on the decision of coordinate bench in the case of M/s. Sanyo India P. Ltd (supra). However, goods sold by M/s. Sanyo India P. Ltd, were similar to goods sold by the chosen comparables viz., Televisions, Projectors, Refrigerators etc., Assessee in the said case, had while adopting the RPM as the MAM found .....

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fore of the opinion that the matter as to the selection of MAM and also the pricing of international transactions of the assessee with regard to its distribution segment requires a fresh look by the TPO / AO. We set aside the orders of authorities below and remit the issue back to the file of TPO / AO for consideration afresh. In the circumstances, we keep the issues raised by the assessee in its grounds 3(ii) to 3(vi) open. AO shall also consider the correct value of the purchase while computin .....

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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 .....

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ndia (Pvt) Ltd (supra), required the assessee to make an estimate of its present obligation resulting from the past events. As per the AO, commercial warranty for all its products was only two years. For sale in residential areas, maximum warranty was for three years except for two out of nine products. Thus according to the AO assessee s claim that its warranty crystalised in fourth or fifth year of sale was not acceptable. Further as per the AO, assessee had not written back the excess provisi .....

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sold by it, assessee had made a conservative estimate of 1% of the sale value of provisioning. As per the Ld. AR, conditions set out by the Hon ble Apex Court was satisfied. Reliance was also placed on the judgment of Hon ble jurisdictional High Court in the case of CIT v. Denso Kirloskar [(2013) 34 Taxman.comm 238]. 15. Per contra, Ld. DR supported the order of the lower authorities. 16. We have perused the orders and heard the rival contentions. It is an admitted position that assessee was mak .....

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t for two items, assessee s warranty period never exceeded three years. Conditions set out by 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 .....

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ities. 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. Counsel for the Assessee submitted that even if it was considered as a capital out go assessee would be eligible for claiming amortisation of such expenditure u/s.35D of the Act. Ld. AR submitted that such alternative contention was .....

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in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),- (i) before the commencement of his business, or (ii) after the commencement of his business in connection with the extension of his undertaking or in connection with his setting up a new unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years .....

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us years", the words "an amount equal to one-fifth of such expenditure for each of the five successive previous years" had been substituted.] (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely : (a) expenditure in connection with- (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other survey necessary for the business of the assesse .....

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