TMI Blog2022 (11) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... M. Considering the facts of the case in totality, we do not find any merit in the TP adjustment in respect of transaction of payment of royalty and accordingly direct the Assessing Officer to delete the adjustment - This ground with all its sub-grounds is allowed and accordingly, grievances raised vide Ground Nos. 1 to 40.6 become otiose. TP adjustment in respect of transaction of provision of Advisory Services - We find force in the concession made by the ld. counsel for the assessee and the ld. DR. We find that the DRP has, in fact, summarily rejected the contentions/objections of the assessee without giving any detailed findings on facts. Therefore, we restore this issue to the file of the DRP. The DRP is directed to decide the objections raised by the assessee by a detailed and speaking order after affording reasonable and adequate opportunity of being heard to the assessee. Accordingly, Ground Nos. 41 and 42 with all its subgrounds are allowed for statistical purposes. TP adjustment in respect of outstanding receivables - We find that the objections of the assessee have been suitably addressed by the DRP by extending credit period from 30 days to 60 days, netti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 493/DEL/2021 - - - Dated:- 17-10-2022 - Shri Chandra Mohan Garg, Judicial Member, And Shri N.K. Billaiya, Accountant Member For the Assessee : Shri Nageshwar Rao, Adv, Ms. Deepika Aggarwal, Adv And Shri Akshay Uppal, Adv For the Department : Shri Bhaskar Goswami, CIT- DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- This appeal by the assessee is preferred against the order dated 31.03.2021 framed u/s 143(3) r.w.s. 144C(13) r.w.s. 143(3A) and (3B) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] pertaining to Assessment Year 2016-17. 2. The assessee has raised as many as 63 grounds of appeal. Therefore, for our convenience, grounds of appeal have been summarized as under: (i) Transfer Pricing adjustment in respect of transaction of payment of royalty; (ii) Transfer Pricing adjustment in respect of transaction of provision of advisory services; (iii) Transfer Pricing adjustment in respect of outstanding receivables; (iv) Disallowance of stock valuation loss; (v) Disallowance of expenditure on corporate social responsibility u/s 115JB of the Act by treating the same as apportion of profits (vi) Disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii. Payment of Royalty TNMM OP/OR 146.989,634 iv. Provision of warranty services TNMM OP/OR 31,807,003 v. Receipt of information technology IT services TNMM OP/OR 148,688,220 vi. Receipt of Infrastructure services TNMM OP/OR 28,923,552 vii. Receipt of Technical services TNMM OP/OR 194,829,634 viii. Purchase of airtime slots TNMM OP/OR 2,327,513 ix. Receipt of repair services TNMM OP/OR 211,093 X, Purchase of Promotional Material TNMM OP/OR 2,681,920 xi. Purchase of Samples TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of TP assessment proceedings, it was noticed that the assessee has paid royalty amounting to Rs. 146,989,634/-. In relation to the transaction, a show cause notice was issued to the assessee by which the assessee was asked to explain the following: The following aspects need to be seen while examining the arm's length nature of royalty payment: (1) The nature and complete description of tire intangible transferred or licensed to the taxpayer in respect of whom royalty is paid is to be examined. (2) As per the Income Tax Act 1961, each class of transactions has to be examined having regard to the arm's length principle. As payment made in the form of royalty is a class of its own, it requires separate analysis. (3) The length of arm s length principle would be to see whether the royalty paid by the taxpayer fur die intangible reflect the same charges for the intangible that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm s length for comparable intangible under comparable circumstances. (4) Royalty payments are to be treated at arm s length only when it is proved substantially by the taxpayer tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scounted cash flow analysis or any cost-benefit analysis, if any, carried out by the taxpayer. 11. In its reply, the assessee submitted that there are certain product categories for which manufacturing function is outsourced by Sony group companies to independent manufacturers. In keeping with this, Sony Corp has appointed Moser Baer India Limited [MBIL] and Competition Team Technology [India] Private Limited [CTTL] as an Original Equipment Manufacturer [OEM] for manufacturing of certain products. 12. It was further explained that SID [the assessee] obtained the license to manufacture and sell various blank optical disc of CD-R, CDRW, DVD + R, DVD-R, DVD-RW and USB Memory under the Sony brand name and further sublicensed the same to MBIL for resale in the local market. 13. The assessee submitted agreements. 14. After considering the submissions and agreements, the TPO formed a belief that there are sufficient reasons to reject the contentions of the assessee since the products were manufactured by CTTL under license from Sony Corporation, Japan and sold by CTTL to the assessee did not justify payment of royalty by the assessee to the AE. 15. Accordingly, the TPO ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed royalty rate and in an uncontrolled transaction, Sony Corp would not allow a third party to use its intangible properties created through a large amount of investment without receiving any sort of consideration. It is the say of the ld. counsel for the assessee that Sony Corp owns patents or own right to use certain patents and any third party would need to make payments for use of such patented technology. 21. The ld. counsel for the assessee continued by stating that royalty transaction has already been bench marked using TNMM as most appropriate method and this fact has been completely ignored by the TPO/DRP. 22. Per contra, the ld. DR supported the findings of the lower authorities and read the relevant portion of the order of the TPO/DRP. 23. We have given thoughtful consideration to the orders of the authorities below. The manufacturing license agreement made on 29.09.2015 is exhibited at pages 1114 to 1125 of the Paper Book. The most relevant part of this agreement is worth mentioning here: WHEREAS, SONY designs, develops and manufactures LCD TV products and related components; and WHEREAS, SID desires to manufacture and sell in the TERRITORY (as hereina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer or assignment of this Agreement by SID to SONY SUBSIDIARIES. SID shall sell the COMPONENTS manufactured by and purchased from SONY SUBSIDIARIES only to the SUBCONTACTOR if not used in the manufacture of the LICENSED PRODUCTS by SID. XXXX (1) SID agrees that it will pay to SONY a running royalty equal to two percent (2%) of the Net Sales determined pursuant to Paragraph (2) of this ARTICLE X for each LICENSED PRODUCT. (2) The Net Sales of the LICENSED PRODUCTS shall, for purposes of this ARTICLE X, be the aggregate of the selling prices in the usual course of business for such LICENSED PRODUCTS by SID, without any deductions other than: (i) sales taxes (and similar taxes pertaining to sale, if any, including but not limited to turnover tax, value added tax and any other corresponding tax imposed cm the LICENSED PRODUCT'S presently or in the future); (ii) usual trade and cash discounts actually allowed; and (iii) if invoiced separately, the selling price of packing material and boxes, cartons and crates in which such LICENSED PRODUCTS are packed, as well as freight and insurance charges. (3) By no later than the first business day of each calendar q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered as manufacturer by TPO/DRP for the purposes of royalty payment because by no stretch of imagination Sony Corp would allow an unrelated party to manufacture its products on which it has sole copyright/trade mark right/manufacturing/distribution rights. 25. Further, we are of the considered view that the TPO has grossly erred in supporting his finding on the premise that the assessee has failed to prove that such intangibles were actually received by it and further failed to prove that such received intangibles have benefitted it. 26. The TPO further erred in justifying his findings by stating that the assessee has not derived any benefit on account of usage of intangible property for which royalty was paid. 27. The Hon'ble High Court of Delhi in the case of Cushman and Wakefield [supra] has categorically held as under: The Court first notes that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine ITA 475/2012 Page 25 whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is No. evidence of services having been rendered at all, the arm's length price of these services is 'nil'. 28. It is also not in dispute that Sony Corp has invested significant amount and efforts in developing, manufacturing intangibles and for which it should be suitably remunerated and since the assessee has received license to use these value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: S. No. Name of the Comparable selected by the assessee Remarks of this office 1 Priya International Ltd. (Segmental) The Service Income is only24.24% which is less than 75%. Hence Rejected as a comparable. 2 ICR A Management Consulting Services Ltd. The company is functionally dissimilar to the nature of operations of this segment of the assessee. Hence Rejected as a comparable. 3 MCI Management (India) Ltd. The company is persistently loss making as it is facing losses in 2 out of last 3 years including the current FY2016. Hence Rejected as a comparable. 4 India Tourism Development Corporation Ltd. (Segmental) Tire company is engaged in progressive development, promotion and expansion of tourism in India. This is in no way comparable to the assessee. Hence Rejected as a comparable. 5 Concept Public Relations India Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice-wise details for export of slow moving goods including amount of invoice, date of invoice and date of payment of invoice. 41. However, the TPO considered the receivables pertaining to international transaction of export of slow-moving goods outstanding for more than 30 days as separate international transaction of unsecured loan extended to AE. 42. The TPO benchmarked this alleged international transaction on a stand - alone basis using PLR as CUP. The assessee contended for application of LIBOR rate as appropriate rate to bench mark transaction but the TPO was of the opinion that income for transactions relating to the sale accrued and arose in India, therefore, domestic prime lending rate has been applied. 43. The assessee raised objections before the DRP maintaining its stand that outstanding receivables cannot be characterized as unsecured loans and, therefore, the TPO erred in bench marking the same by applying PLR to compute notional interest. 44. After considering the facts, the DRP directed the Assessing Officer to consider 60 days credit for bench marking of impugned international transaction. The DRP further directed to net off payables and charge interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer. 55. The ld. DR placed strong reliance on the findings of the Assessing Officer. 56. We have given thoughtful consideration to the orders of the authorities below. At the very outset, we have to state that the observations/comments by the Assessing Officer on application of Accounting Standard 2 is without any merits and, in fact, uncalled for. Secondly, it is an undisputed fact that the assessee has been consistently following the same method of valuation of closing stock which was cost or net realizable value, whichever is lower. 57. The Hon'ble Supreme Court in the case of Woodward Governor India [P] Ltd 312 ITR 254 had an occasion to consider similar grievance and the Hon'ble Supreme Court held as under: The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P L account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading section 37(1) with section 145. For valuing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 1961 Act. 16. In the light of what is stated hereinabove, it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant accounting standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of accounting. It is well-established, that, on general principles of commercial accounting, in the P L account, the values of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower - the market value being ascertained as on the last date of the accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word profit implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of income-tax at the rate of eighteen and one-half per cent: Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words eighteen and one-half per cent occurring at both the places, the words fifteen per cent had been substituted. (2) Every assessee,-- (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or (b) being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including statement of profit and loss,-- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest, 52[dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or (fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (g) the amount of depreciation, (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, (k) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions in securities; or (B) the interest, 53[dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if such income is credited to the statement of profit and loss and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (iie) the amount representing,-- (A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or (B) notional gain resulting from any change in carrying amount of said units; or (C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the statement of profit and loss; or (iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of deferred tax, if any such amount is credited to the statement of profit and loss. 11. In our considered opinion, none of the clauses above provides that CSR expenses have to be added to book profit. Except for the wild imagination of the Assessing Officer by no stretch of imagination, it can be said expenditure on CSR expenses is a transfer to/from reserve. Hon'ble Apex Court in Apollo Tyers (supra) have clearly laid down that the Assessing Officer or assessee, none can tinker with book profit disclosed in audited account. It is not the case that the accounts have not been prepared as per accepted accounting principle. Once the accounts have been prepared in accordance with standards in this regard, this tinkering by the Assessing Officer has no sanction of law. We have no hesitation in setting aside the addition to book profit in this regard. 61. As no distinguishing decision has been brought to our notice, respectfully following the decision of the co-ordinate bench [supra], we direct the Assessing Officer to delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FY 2014-15 1,10,10,30,08,336 1,44,21,67,488 2,47,41,55,169 2,56,83,83,121 - 1,34,79,39,537 FY 2015-16 80,73,33,57,459 1,34,79,39,537 1,93,41,11,353 2,31,42,46,202 - 96,78,04,688 67. The Assessing Officer observed that every year the assessee has net surplus in provision for warrantee account. Over a period of time of seven years, the assessee has a surplus of 96.78 crores in the provision account. The Assessing Officer was of the firm belief that the provision has been claimed as expenditure but remained unutilized. 68. The assessee was asked to show cause as to why addition of provision for warranty in the immediately preceding year should not be persisted this year. 69. The assessee relied upon the decision of the Hon'ble Delhi High Court in its own case wherein the Hon'ble High Court has decided that warrantee provision is not a contingent liability and is allowable as deduction u/s 37(1) of the Act. 70. The Assessing Officer did interpret the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the extent of 1.75% of total sales will be sufficient to meet the requirement of provision. Thus, the amount of provision to the extent of 1.75% of the total sales is allowed and the balance amount is added to total income. The amount of allowance at the rate of 1.75% comes to Rs. 141,28,33,755. The balance amount of Rs. 52,12,77,597/- ( 80733357459*2.395678% - 80733357459*1.75%) is proposed to be disallowed and added to the total income of the assessee for the year. 9.22 ln all likelihood, the Assessee will take the plea that there has been actual expenditure of Rs. 2,31,42,46,202 on account of warranty for this year itself and therefore, a disallowance of Rs. 52.12 crores is unreasonable. In that regard, it is stated that the Assessee already has a balance of Rs. 134.79 crores in provision account against which the excess amount can be adjusted. If the rate of 1.75% is adopted for subsequent years also, in that case, the reserve will be used and the same will meet the requirement of write back in subsequent years. 9.23 The excess provision to the extent of Rs. 52.12 crores takes the character of contingent liabilities and therefore, it is proposed to be added to the book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nty is an allowable deduction even when the amount payable by the assessee is quantified and discharged in future. The following passage from the above decision is in this regard apposite: 14. The ratio decidendi of the above cases is squarely applicable to the facts of the present case. It is not disputed that the warranty clause is part of the sale document and imposes a liability upon the assessee to discharge its obligations under that clause for the period of warranty. It is a liability which is capable of being construed in definite terms which has arisen in the accounting year. May be its actual quantification and discharge is deferred to a future date. Once an assesee is maintaining his accounts on the mercantile system, a liability accrued, though to be discharged at a future date would be a proper deduction while working out the profits and gains of lfis business, regard being had to be accepted principles of commercial practice and accountancy. (p. 343) 3. In the instant case also, the assessee has on the basis of the past experience and the extent of claims made against it, set apart different amounts for different assessment years. It is not the case of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12,14,800 6,07,400 2(e) Sub-total (B) 1,66,24,833 83,12,417 Total deduction under sec. 80G of the Act (A+B) 3,22,54,517 78. In support of the above claim, the assessee moved an application for rectification u/s 154 of the Act in respect of final assessment order passed u/s 143(3) r.w.s 144C of the Act. 79. Considering the claim of the assessee, we direct the Assessing Officer to consider the same as per the provisions of law. The assessee is directed to furnish necessary evidences in support of its claim and the Assessing Officer is directed to examine the same and decide the issue after affording reasonable and adequate opportunity of being heard to the assessee. This issue is allowed for statistical purposes. Ground No. 61 is disposed of accordingly. 80. Ground Nos. 62 and 63 are not pressed. The same are dismissed as not pressed. 81. In the result, the appeal of the assessee in ITA No. 493/DEL/2021 is allowed in part for statistical purposes. The order is pronounced in the open court on 17.10.2022 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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