TMI Blog2022 (5) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the assessee. Transfer pricing adjustment in manufacturing segment relates to the error in computing net margin on cost of comparable companies - A.R. submitted that the TPO has computed net margin on cost of comparables as 8.16% while the actual margin works out to 9.10%. The ld. A.R. submitted that the assessee has raised this issue before Ld. DRP but the DRP did not adjudicate the same - HELD THAT:- We heard Ld. D.R. on this issue. Since this claim of the assessee requires verification, we restore this issue to the file of AO/TPO to examine this claim of the assessee. Transfer pricing adjustment made in manufacturing segment relates to claim for working capital adjustment - HELD THAT:- There should not be any dispute that the working capital adjustment should be allowed if the working capital levels of comparable companies differ from that of the assessee. The claim of the assessee gets support from the decision rendered by the co-ordinate bench in the case of Huawei Technologies India P Ltd. [ 2018 (10) TMI 1796 - ITAT BANGALORE] . Accordingly, we restore this issue to the file of the AO/TPO with the direction to allow working capital adjustment on actual ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ALP and consequent transfer pricing adjustment are the result of legal fiction enacted in Income tax Act. There should not be any doubt that it is altogether a different exercise unconnected with the provisions relating to allowance or disallowance of expenses. Net margins of the assessee as well as comparable companies are computed under TNM method on the basis of book results without making any adjustment as prescribed in sec.28 to 44 of the Act (both in the hands of the assessee as well as in the hands of comparable companies.) Hence these contentions of the assessee are untenable and hence liable to be rejected. Adjustment for customs duty due to difference in the quantum of imported goods purchased by assessee vis- -vis comparable companies - HELD THAT:- We find merit in the contentions of the Ld A.R. We notice that the AO has only assumed that these expenses would give rise to creation of any patent or know-how and accordingly took the view that these expenses are capital in nature, i.e., there is no material with the AO to show that these expenses have resulted in creation of any patent or know how as assumed by him. Hence, we are of the view that the AO has disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various companies with a markup of 5% on cost. The associated enterprise named SKF Data services AB has acted as centralized facilitator. During the year under consideration, the assessee has paid a sum of Rs.3,63,56,935/- to its AEs for group IT charges and group service fee. The TPO determined the ALP of above said intragroup services as NIL. Accordingly, he made transfer pricing adjustment of Rs.3.63 crores in respect of intra-group services. 4. The AO issued draft assessment order making addition of T.P adjustments referred above. Besides, the AO also made additions on account of disallowance of product development expenditure, disallowance of provision for customer claims, disallowance of bad debts. The Ld. DRP directed the TPO to examine the working of profit while computing adjustment in respect of manufacturing segment. With regard to TP adjustment made in respect of intragroup services, the Ld. DRP upheld the TP adjustment made. The Ld DRP confirmed the additions in respect of disallowance of product development expenditure, disallowance of provision for customer claims, disallowance of bad debts. The A.O. passed the final assessment order determining total income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the following 3 issues: - a) Disallowance of product development expenditure b) Disallowance of provision for customer claims c) Disallowance of bad debts. 8. The assessee has filed additional grounds questioning the validity of assessment order on the reasoning that the AO has passed the order not following the directions of Ld DRP and the it vitiates the assessment order. However, the Ld A.R did not press the same at the time of hearing. Accordingly, the said additional grounds are dismissed as not pressed. 9. We shall first take up the addition made towards transfer pricing adjustment. In ground No.1(v), the assessee seeks adjustment for under utilization capacity for manufacturing segment. The Ld. A.R. submitted that the assessee has utilised only 41% of its installed capacity during the year under consideration. Hence the assessee claimed adjustment for under utilisation of capacity before TPO, the same was not allowed by both TPO DRP. The Ld. A.R. submitted that the issue of capacity utilisation adjustment has since been adjudicated by the Tribunal in the assessee s own case in assessment year 2004-05, wherein the Tribunal has held that there is merit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on actual basis. 14. We heard Ld.D.R. on this issue. There should not be any dispute that the working capital adjustment should be allowed if the working capital levels of comparable companies differ from that of the assessee. The claim of the assessee gets support from the decision rendered by the co-ordinate bench in the case of Huawei Technologies India P Ltd (2019)(101 taxmann.com 313)(Bang.). Accordingly, we restore this issue to the file of the AO/TPO with the direction to allow working capital adjustment on actual basis. 15. The next issue urged in ground No.1(viii) in respect of transfer pricing adjustment made in manufacturing segment relates to the action of TPO in not restricting the transfer pricing adjustment to the sales made to Associated Enterprises. The Ld A.R. submitted that the assessee has raised this issue before Ld. DRP, but the Ld. DRP has rejected the contentions of the assessee by observing that the basic structure of the law is to benchmark all international transactions at entity level as per sec. 92(1). The Ld. A.R. submitted that it is a settled principle that the TP adjustment should be restricted only to international transaction. 16. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of payment made. It was also held that the assessee is duty bound to bench mark such services by comparing it with uncontrolled transaction by independent enterprises where similar services are received. The observations made by the Tribunal in assessment years 2006-07 2007-08 are extracted below:- 19. In our opinion, there is no doubt that assessee has to establish receipt of benefits on account of services rendered by its AEs and these were compensated on a level comparable to payments that would have been made if similar services were received from unrelated parties or in an uncontrolled transaction. At the same time, it is not open for the TPO to consider that there was no benefit whatever received by the assessee without verifying the documentation submitted by the assessee. As per the assessee, it had evidence to show that there was considerable correspondence between the AE and itself which could amply prove rendering of services by the AEs to the assessee. The facts and circumstances of the case as described above show that the question of bench-marking the value of such services requires a fresh look by the AO/TPO. We therefore set aside the orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s without making any adjustment as prescribed in sec.28 to 44 of the Act (both in the hands of the assessee as well as in the hands of comparable companies.) Hence these contentions of the assessee are untenable and hence liable to be rejected. 23. The next claim urged in I(xvii) is adjustment for customs duty due to difference in the quantum of imported goods purchased by assessee vis- -vis comparable companies. In our view, the assessee, apart from rising this ground, has not demonstrated as to how the customs duty paid by it has materially affected its comparability with comparable companies. In the absence of relevant details, this claim of the assessee is also liable to be deleted. 24. We shall not deal with corporate issues urged by the assessee. The first issue relates to disallowance of Product Development Expenses of Rs.41,57,479/-. (net amount of product development expenses less depreciation allowed by AO). The AO noticed that the assessee has claimed a sum of Rs.55,43,305/- as product development expenses. From the details furnished, the AO noticed that it was incurred for new parts development, improvement in existing parts and prototype development expenses as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision is made on a consistent and scientific basis, the assessee manufactures multiple products and non utilized portions of earlier years are either written back or reduced from the new provisions etc, the expenditure should be allowed u/s 37(1). We dispose of this objection with the above direction. 28. The Ld A.R submitted that the AO has not followed the directions given by Ld DRP and accordingly retained the addition without making any further examination as per the decision of Hon'ble Supreme Court in the case of Rotork Controls India. 29. We heard Ld D.R and perused the record. It is unfortunate that the AO did not follow the directions given by Ld DRP. Accordingly, we restore this issue to the file of the AO with the direction to examine the claim of the assessee in accordance with the principles laid down by Hon'ble Supreme Court in the case of Rotork Controls India case. 30. The last issue relates to the disallowance of bad debts claim. The assessee had claimed a sum of Rs.21,45,150/- as deduction towards Provision for bad doubtful debts . The AO noticed that the assessee had disallowed a sum of Rs.19,57,793/- only in the computation of income. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X
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