TMI Blog2012 (12) TMI 1166X X X X Extracts X X X X X X X X Extracts X X X X ..... f goods 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the preceding years in 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entive amounting to ₹ 78,72,603 and rebate received amounting to ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascertained liability incurred at the time of sales and is not a contingent liability. 5. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of the shares of the entity. The Scope of this policy does not include the transfer pricing of tires between the Goodyear Tire and Rubber Company and Goodyear Canada Inc., or the sale of tires form Goodyear Brazil to any other Goodyear entity, as they are covered by separate policies. Policy The inter-company transfer price should be set to allow the Manufacturing Entity to earn a profit equal to a 5% markup. The manufacturing entity 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er company receivables. The inter company payment terms established and maintained by the corporate treasury department are established based upon arm s length principles and therefore no additional compensation would be appropriate. 5. TPO observed that Govt. of India has initiated the concept of export benefits to the taxpayers to promote and stimulate the growth of exports of goods and services from India to various other countries. That the other 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In that case, TPO wondered as to how can the assessee reduce it from the cost of goods sold. He observed that it is a well settled principle that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. TPO observed that the assessee s method of accounting jugglery was employed to sell goods to AE without the markup as prescribed by the assessee s global transfer pricing 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 transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,07,57,058 Difference 11,313,182 Thus, TPO observed the value of international transaction of the assessee relating to export of traded goods shall be adjusted upward by ₹ 11,313,182/- to bring it to arms length. 9. The assessee in this case has submitted the objections to the Disputes Resolution Panel (DRP). However, the DRP rejected the assessee s submissions. The DRP noted that assessee has not shown any profit on the transactions of the material costing ₹ 11,07,19,519/-. The DRP noted that TPO has computed the operating profit on the same by taking suitable mark up of 5%. That the assessee has simply justified its transactions which have been entered into, without profit which is highly unlikely as per the prevalent Global Transfer Pricing Policy. Accordingly, DRP held that it found that no compelling reasons to interfere with the order of TPO in this regard. 10. Against the above order the assessee is in appeal before us. 11. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Counsel of the assessee submitted that export incentives received for sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, the profit margin from such export for traded products would remain the same as computed hereinabove. (ii) As per the GTPP, the exporting group entity can recover the inventory cost and all applicable other costs, plus the 5% profit mark-up. Accordingly, the inter-company selling price may include other mark-ups to cover other directly related expenses such as general and administrative expenses and research and development expenses. An illustration from the GTPP which evidences the fact that export incentives are to be deducted for computation of the inter-company transfer price is reproduced below: Normal Special VPrice Special VPrice Transfer Price $ Cost (NFLC) $ Cost (FLC) $ Materials 25.70 25.70 25.70 Labor 0.92 0.92 0.92 Variable OH 13.58 13.58 13.58 Fixed OH 7.80 N/A 7.80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56.00 56.00 Customer Less: Total Cost 46.55 55.39 Total Profit 9.45 0.61 Total Exporter Cost 44.05 52.45 50% Profit to Exporter 4.73 0.31 50/50 Special V -Price 48.78 52.76 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1921 Comparative prices 12056 12595 The price works out to ₹ 12,056 against ₹ 12, 595 charged from Sony Japan after taking benefit permissible in export scheme @18% . ....... In the light of above evidence, we are of the view that transaction of sale of CTV to Sony Japan was carried by taxpayer at Arm's Length and. therefore, adjustment made by the TPO and upheld in appeal by the Ld. Commissioner of Income Tax (A) is not called for. It is directed to be deleted. [Emphasis supplied} In that case the Hon'ble Tribunal also held that sales / service tax refunds can reasonably be treated as operational income of the taxpayer and can be included in working out its operating profit. The assessing officer would appreciate that the nature of export incentives is akin to that of sales / service tax refunds, since they are also tax benefits given to companies by the 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, it would also be noted that the TPO has himself in the order passed for the assessment year 2007-08 and 2008-09, accepted the contention of the assessee that rebate received upon purchase of goods is deductible from the value of cost of goods sold. It would be appreciated that considering the orders passed by the TPO for subsequent assessment years and the commonality of facts, there would be no reason not to deduct the amount of rebate received from the value of cost of goods sold, while determining the arms length price of export of goods for assessment year 2006-07. Although there is no res judicata in income-tax proceedings, the Supreme Court in the case of Radhasoami Satsang V. CIT: 193 ITR 321 at page 329 held that where a fundamental aspect permeating through different years is found as a fact one way or the other and parties have allowed that position to remain, it is not possible to come to a different conclusion in the subsequent year. There has been no change in fact and in law in the appellant's case and following the principle of consistency, as laid in the following decisions, the rebate received by the appellant shall be reduced from the cost of goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (78,72,603) Add: Freight cost 55,37,853 Less: Rebate / Discount received (33,21,586) Total 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 11.4 It was submitted before the TPO that for computing the gross profit margin or the mark-up from such international transactions of export of traded goods to the AEs, the export incentive amounting to ₹ 78,72,603 and rebate/discount amounting to ₹ 33,21,586 received in respect of such purchases from GSATL in terms of the Off-take agreement dated 01-09-2001 is to be deducted from the cost of goods sold. 11.5 As regards issue of reduction of export incentive from goods sold is concerned, we find that the reasoning adopted by the TPO has considerable cogency. The export benefits are given to the taxpayers to promote a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.7 From the above it follows that while determining the gross profits from sale of goods such incentives cannot be adjusted to determine the cost of goods sold. TPO has rightly observed that export incentives does not form part of the invoice price of goods sold. In such a case, it cannot be reduced from the cost of goods sold. We agree with the TPO that an expenditure that does not form part of the books of accounts cannot be treated as an expense for the purpose of transfer pricing accounting. 11.8 Assessee s reliance of Accounting Standard (AS)-II- Verification of inventories issued by Institute of Chartered Accountant of India (ICAI), for the purpose of determining the cost of purchase is not cogent as the reference to cost of purchase in this is not in the context of arm s length price in transfer pricing. 11.9 Assessee s reliance on the decision of the ITAT in Sony India (P) Ltd., vs. DCIT (Supra) is not applicable on the facts of the present case. The portion of this decision referred by the assessee s counsel was in the context of manufacturing of export to utilize idle facilities to enable the company to improve recovery of its fixed assembly cost. Moreover, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verification of netting off of rebate from cost of purchase to the file of Assessing Officer. Needless to add that the assessee should be given adequate opportunity of being heard. 13. Ground nos. 3 to 3.4 On this issue, the Assessing Officer proposed that why not 20% disallowance be made out of machinery repair and maintenance due to high machinery repair expense of ₹ 4.985 crores. Assessee submitted that the plant and machinery was very old and requires regular repair and maintenance. Therefore, the repair and maintenance expenses are higher this year. Assessing Officer found that this reply of the assessee was very general. He observed that assessee has not made any specific reasons for steep increase in the repair and maintenance of the expenses while the sales remained almost same. He further observed that it was found in earlier assessment years 2003-04 2004-05, that many items shown as issues from companies owned stores under the head repair included various items of capital nature and therefore, part of the repair and maintenance expenses were disallowed. Assessing Officer further observed that it was seen from the detail of repair to machinery account that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04. Without prejudice to the aforesaid, the assessing officer did not allow depreciation on the aforesaid amount ofRs.99,69,422 held to be capital expenditure. 14.1 Ld. Departmental Representative relied upon the order of the TPO and DRP. 14.2 We find that on this issue Assessing Officer has made an adhoc disallowance of 20% of the expenditure incurred on machinery repair and maintenance on the premise that the same is capital expenditure. Assessing Officer has not identified as to which items in his opinion are in capital expenditure. In this regard, we also note that such adhoc disallowance were also made by the Assessing Officer in the preceding years in the case of the assessee. But the Delhi Tribunal in assessee s own case for assessment year 2003-04 and 2004-05 upheld the order of the Ld. Commissioner of Income Tax (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, in the background of the aforesaid discussions and precedents, we set aside the order of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture to be incurred on account of warranty obligation in respect of sales made in the relevant previous year is to be accounted as expenditure in the year of sale, in order to match cost with revenue. The provision for warranty is necessarily required to be made by companies which are required to follow mercantile system of accounting. The Courts have consistently held the view that liability for provision for warranty for replacement on account of manufacturing defects arises at the time of sale and is to be allowed as deduction in that year on the basis of rational/ scientific estimate, notwithstanding that the exact amount of liability is ascertained at a later date. Reliance is placed in this regard on the recent decision of Supreme Court in the case of Rotork Controls India Ltd. vs. CIT : 314 ITR 62, wherein, the Supreme Court laid down three conditions for allowability of provision for warranty (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; and (c) a reliable estimate can be made of the amount of the obligation. Relying on the above decision in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 manufacturing defects arises at the time of sale and is to be allowed as deduction in that year on the basis of rational /scientific estimate, notwithstanding that the exact amount of liability is ascertained at a later date. We further find that action of the assessee in creating provision for warranty is also in consonance with the decision of the Hon ble Apex Court in the case of Rotork Controls India Ltd. vs. C.I.T. 314 ITR 62. Similarly, we find that relying on the above decision in the case of Rotork Controls the Hon ble High court in the case of C.I.T. vs. Whirlpool of India 242 CTR 245 too, dismissed the grounds of the revenue for disallowing provision for warranty. Reliance by the assessee s counsel in other case laws in this regard as mentioned above are also germane and support the case of the assessee. In the background of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
