TMI Blog2020 (9) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the assessee to provide defect free motors to the end customers. Thus, respectfully following the finding of the Hon'ble Delhi High Court [2012 (4) TMI 346 - DELHI HIGH COURT ] we delete the transfer pricing adjustment. We direct the ld AO/ TPO to delete the adjustment arising on account of determination of ALP of the international transaction of reimbursement of expenses paid by the assessee to its associated enterprises on account of testing charges. - IT(TP) APPEAL No. 4765/Del/2015 - - - Dated:- 31-8-2020 - Ms Sushma Chowla, Vice President And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Tarandeep Singh, Adv For the Revenue : Shri M. Bavanwal, Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by the assessee against the order of the ld CIT (A), Faridabad dated 12.06.2015 for AY 2010-11 wherein, the appeal filed by the assessee against the assessment order passed u/s 143(3) of the Act on 11.04.2014 by the ld Dy Commissioner of Income Tax, Circle-1, Faridabad was partly allowed. 2. The assessee has raised the following grounds of appeal:- 1. That on the facts and in the circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d therefore, the ld AO referred to the Ld Transfer Pricing Officer for determination of Arm s Length Price of the international transaction. The assessee has entered into several international transactions, such as purchase of raw material, export of motors, import of capital goods, provision of services and reimbursement of expenses paid and received. 6. Only dispute is with respect to the reimbursement of expenses paid by the assessee to its associated enterprises having the value of transaction of ₹ 5870089/-. 7. The assessee is engaged in manufacturing and sale of fractional Horse Power electric motors, which find wide application in domestic use products like air conditioners, coolers, washing machines etc and electric fans. It has one manufacturing unit set up as an Export Oriented Unit (EOU) and second was in the domestic Tariff Area (DTA) Unit. 8. The international transaction of reimbursement of expenses paid by the assessee relates to testing/ firewall charges on a cost-to-cost basis. Assessee exports Motors. These motors are tested by third party in destination of export. Testing is done by third party. Third party is paid by AE and assessee reimburses tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 55487350/- against the return income of ₹ 41976399/-. 12. The assessee preferred an appeal before the ld CIT (A). He confirmed the above adjustment. The reasons was that he concurred with the views of the ld AO/ TPO that no unrelated party would make payment for testing of motors when there is remote possibility that fault would be found and further when the goods are covered by warranty. He also noted that in assessee s own case for AY 2008-09 the ld DRP-1, New Delhi as per their direction dated 27.08.2012 have upheld the action of the ld AO making the identical adjustment. Thus, this addition was upheld. Therefore, assessee is in appeal before us on this ground as per Ground no [2] of this appeal. 13. The ld AR firstly referred to submission made before the ld TPO and then submitted that in AY 2007-08 and 2009-10 in ITA No. 5257/Del/2014 and in ITA No. 1060/Del/2014 per order dated 19.02.2020 the issue has been decided by the coordinate bench in favour of the assessee. Thus, issue is squarely covered in favour of the assessee. He even otherwise relied upon the decision of the Hon ble Delhi High Court in EKL Appliances Ltd in ITA No. 1068/2011. 14. The ld DR vehe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would make payment for testing of motors in which no fault is detected; d) No independent party would pay such testing charges when goods are covered by warranty; 5.1 The learned TPO in view his observations, benchmarked the transaction applying CUP method and valued at nil. 5.2 The learned counsel for the assessee submitted that the learned TPO/DRP has ignored the following points which are primary reasons for which the assessee is incurring such expenses: (i) Impact on the brand reputation: It is important to understand that the main reason behind incurring such expenses is to ensure that none of the motors are defective when sold to the customer in the overseas market. It is pertinent to note that the product liability risk, in a value chain, is that of a manufacturer. Since in the instant case. MEIPL is the manufacturing entity, any defect in the product will have a detrimental effect on the brand reputation of MEIPL. In case any defect is identified in the goods which are being sold in the US market, the reputation of MEIPL would be impacted and not that of the distributor as the distributor is earning a gross margin by just rendering distribution services. Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld the AE start to bear these expenses it's margins would take a hit. In any third party set-up such costs can never be passed onto the distributor. 5.3 Further, the learned counsel also submitted that why such testing was required and how it was different from warranty and other expenses, which are as follows: 11. The Ld. TPO has compared this expense with warranty' expenses. It is true that Assessee provides warranty, but this expense is separate and distinct to firewall charges. Any motor that does not contain moisture may also have functional problems (i.e. other problem relating to functionality of the motor) because of which MEIPL could bear the warranty charges. But it is the responsibility of the Assessee to provide the motors in working conditions. It is also important to point out that if products are sold without testing, it can lead to extra claims on warranty - which not only is economically non-viable but also impacts reputation of the company's brand. 12. The Ld. TPO has also stated that this is a duplicative service. Again, the Ld. TPO/Ld. DRP has not appreciated or understood the nature of the transaction. This testing can never be done in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction is to be identified. In this case, admittedly, no such companies were identified by the TPO or DRP. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the authorities below. 18, In the case of SNF (India) Pvt. Ltd. (ITA No. 279 280/VIZ/2017) (refer para 15, page 22 23 of the ruling; to be handed over by the counsel) wherein it was held that: 15. During the appeal hearing, the Id.AR argued that the payment of royalty is interlinked with the manufacturing activity and other trading transitions, therefore, the TNMM is most appropriate method at the entity level and it is necessary to aggregate the entire transactions without delinking with the royalty payments. The Department could not establish that the royalty is independent and separate transaction for unbundling the royalty from the other transactions to determine the ALP independently. Once it is accepted that the technical support is required for manufacturing the product and it is interrelated the payment of royalty cannot be segregated and the transactions required to be aggregated at the entity level and the ALP required to be determined on the whole transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that it is not necessary for the Respondent to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the Respondent to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 5.6 On the contrary, learned DR relied on the order of the lower authorities and submitted that the services are in the nature of the duplicate in view of covered by the warranty and thus the learned TPO has correctly determined the ALP at Nil. 5.7 We have heard the rival submissions of the parties and perused the relevant material on record. We find that the Hon'ble Delhi High Court in the case of EKL Appliances (supra) has held that the TPO is expected to examine the international transaction as he actually finds the same and then make suita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c., the assessee was not required to incur expenditure on firewall charges. The contention of the assessee seems plausible that motors were required to checked for content of moisture acquired in transport from India to the USA, i.e., the destination point and it was the responsibility of the assessee to provide defect free motors to the end customers. Thus, respectfully following the finding of the Hon'ble Delhi High Court (supra), we delete the transfer pricing adjustment of ₹ 2,54,42,211/-. Accordingly, the appeal of the assessee is allowed. 16. The ld DR could not distinguish the decision of the coordinate bench either on the facts or law. In view of above finding of the coordinate bench in assessee s own case, for AY 2009-10 2010-11, respectfully following the same, we direct the ld AO/ TPO to delete the adjustment of ₹ 5870089/- arising on account of determination of ALP of the international transaction of reimbursement of expenses paid by the assessee to its associated enterprises of ₹ 5870089/- on account of testing charges. Accordingly, ground No. 2 of the appeal is allowed. 17. In the result appeal of the assessee is partly allowed. Order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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