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TMI Blog2022 (5) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration. The assessee furnished segmental details for manufacturing activity and trading activity. The TPO accepted international transactions relating to trading activity to be at arms length. In respect of manufacturing activity, he made transfer pricing adjustment of Rs.7,28,39,511/-. 3. The assessee had also made payment of Rs.5.63 crores to its AEs for intra-group services. It was noticed that the expenses in respect of intra-group services were allocated proportionately to 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P of intra-group services, having been taken as NIL, it should have been excluded from the operating expenditure while computing margin of manufacturing segment. (b) the amount disallowed by the AO should be eliminated while computing margin of the assessee, as the same would result in double disallowance. (c) adjustment on account of difference in additional cost of import should have been granted. 7. The corporate grounds urged by the assessee relates 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. submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e file of AO/TPO to examine this claim of the assessee. 13. The next issue urged in ground No. I(vii) in respect of transfer pricing adjustment made in manufacturing segment relates to claim for working capital adjustment. The Ld. A.R. submitted that the TPO did not allow working capital adjustment and the Ld. DRP did not render its decision on this claim. Accordingly, he prayed that the AO/TPO may be directed to allow working capital adjustment 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that an identical adjustment made by the TPO in assessment year 2006-07 & 2007-08 in the assessee's own case (IT TPA No.1481/Bang/2010 & IT (TP)A No.1339/Bang/2011 - Order dated 31.3.2016) has been considered by the Tribunal and the issue was restored to the file of AO/TPO with a direction to examine this issue afresh by considering the evidences that may be produced by the assessee to prove the receipt of benefit from AEs in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all, the entire exercise of determination 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. 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-à-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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO took the view that this expense has not crystallized and hence not allowable. The Ld DRP directed the AO as under:- ".... In the present case, the AO has made the disallowance simply on the ground of the provision being a contingent liability. This is not adequate. We direct him to examine the expenditure with particular reference to the conditions laid down in the Rotork India case and if it is found that the provision 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 clai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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