TMI Blog2022 (2) TMI 1350X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 has been reproduced hereinabove wherein all these aspects have been considered. This Tribunal for A.Y. 2007-08 has deleted the adjustment made by the Ld.TPO in respect of royalty by separately bench marking the transactions. This has been fortified by the clarification given in a Miscellaneous Petition filed by the department which is also reproduced hereinabove. This view is also supported by various decisions of Coordinate Benches of this Tribunal as well as various High courts. Cojoint reading of these orders, we direct the Ld.AO/TPO to delete the adjustment proposed for royalty as a separate international transaction. Respectfully following the above view, we direct the Ld.AO/TPO to delete the adjustment proposed towards royalty as a separate international transaction. MAT computation u/s 115JB - provision towards warranty while computing the book profits under section 115JB - addition made as it is provision to meet contingent liability and is not an ascertained liability - AO allowed the same in normal computation - HELD THAT:- As relying on case of Toyota Kirloskar Motors P Ltd. [ 2013 (2) TMI 108 - KARNATAKA HIGH COURT ] we remand this issue back to Ld.AO for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The lower authorities have erred in not appreciating that the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X' and therefore addition under Chapter X is bad in law. 7. The lower authorities have erred in passing the order without demonstrating that the appellant had any motive of tax evasion. 8. The lower authorities have erred in not appreciating that there being no disallowance under section 40A(2) for purchase of parts and components, royalty and technical fees paid, adjustment under Chapter X ought not to be made. 9. The lower authorities have erred in making transfer pricing adjustment for the year under consideration, although, the method adopted, the associated enterprises, the nature of transactions and the comparables were same as in the earlier years in which no similar adjustment had been made. GROUNDS RELATING TO ALP OF AGGREGATION OF TRANSACTIONS INCLUDING ROYALTY PAID 10. The lower authorities have erred in: a. not appreciating that the trading and manufacturing segments are intertwined and inter-related warranting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 92C (2). CORPORATE TAX GROUNDS 15. The learned CIT(A) has erred in confirming the action of the AO of disallowing the provision towards warranty while computing the book profits under section 115JB of the Act without appreciating that provision was in respect of a liability that was real, ascertainable and bonafide and not a contingent liability. 16. The learned AO has erred in levying interest under section 234B. The appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income Tax Appellate Tribunal to decide the appeal according to law. The appellant prays accordingly. Revenue s appeal: 1. The order of Ld CIT(A) is opposed to law and facts of the case. 2. The Ld. CIT(A) has erred in directing the TPO identify suitable comparables and also directed the TPO to provide adequate opportunity to the assessee but as per the TP guidelines the Royalty payments are to be considered separately alongwith und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts AE. TNMM was applied using combined transaction approach at the entity level. While computing ALP, the assessee aggregated manufacturing and trading segment. The assessee had high import content when compared to comparable selected and therefore made custom duty adjustment. It is submitted that the adjustment was made only for basic custom duty, for which input credit is not available. 2.4 The assessee used 7 comparables with CP/NS as the PLI and computed its margin at 15% as against 7% of the comparables selected. SI. No. Name of the Company OP on Sales % CP on Sales % 1 Ashok Leyland Ltd. 7 10 2 Bajaj Tempo Ltd. 3 6 3 Eicher Motors Ltd. 6 8 4 Hindustan Motors Ltd. -2 2 5 Mahindra and MahindraLtd. 4 8 6 Swaraj Mazda Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly received any technical know-how during the year under consideration from AE; f) that there is no proof that the Other group concerns or third parties are also charged identical royalty; g) that the taxpayer has also not been able to show it derived any economic benefit from the alleged know how received from the AE. 2.7 Based on the above reasons, the Ld.TPO determined the ALP of international transaction relating to Royalty at NIL by selecting CUP method as the most appropriate method to determine the ALP. Accordingly, a TP adjusted of Rs.61,44,90,556/- was made in respect of the Royalty payment by the Ld.TPO. 2.8 The Ld.AO incorporated the TP additions in the assessment order. While computing the total income in the order, the Ld.AO added back (i) Rs.33,65,497/-(Net) being value of testing vehicles not forming part of closing stock, (ii) Rs.90,64,082 (Net) being write off of slow moving stock, (ii) Rs.7,49,494 (Net of depreciation) being value of software licenses purchased being debited to software expense. The Ld.AO also added Rs.6,06,00,000/- being provision for warranty to book profits u/s 115JB of the Act. Aggrieved by the order of Ld.AO, the assessee fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e most appropriate method. The most appropriate method is to be selected having regard to nature of transaction or class of transaction or class of associated persons, functions performed, assets employed and risks assumed etc. 7. The assessee selected TNMM as the most appropriate method is not disputed by the revenue. The Ld.AR submitted that the TNMM considers the net profit margin earned by an organization. Adjustments are made to the net profits to factor in the differences at the transaction level or the enterprise level. It is submitted that the adjustments are also made for difference in the accounting methodology. TNMM makes a comparison at the entity / global / segment level and not at the transactional level. He assailed that the merit of this method is that, it is resilient to minor functional differences. As a result of this characteristic, examination is not made at the individual component level of income or expenditure that has been reckoned in arriving at the net profit but at the entity level. The Ld.AR emphasized that when comparison is made at the macro (global) level, where multiple intertwined transactions exist, it is not possible to identify or pinpoint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f records placed before us. It is the contention of the Ld.AR that assessee has paid royalty to TMC in accordance with the technical service agreement being an integral part of the manufacturing activity. Admittedly, the Ld.TPO upon segregating the manufacturing and trading activity found the margin determined under the separate segments to be at arm s length. It has been submitted by Ld.AR that for: A.Y. 2008-09 in IT(TP)A No. 1595/Bang/2012, A.Y. 2010-11 in IT(TP)A No. 16/Bang/2015 and A.Y. 2013-14 in ITA Nos. 2016 1972/Bang/2018 the Coordinate Bench of this Tribunal in assessee s own case has analysed that the royalty payment has been made by assessee towards the license to manufacture items on exclusive basis. It is also been submitted that in the sister concern s case being Toyota Kirloskar Auto Parts for A.Y. 2007-08 in IT(TP)A No. 1356/Bang/2011, this Tribunal has taken similar view. We note that for A.Y. 2007-08, this Tribunal in assessee s own case for A.Y. 2007-08 reported in [2014] 48 taxmann.com 380 has considered the issue of separately bench marking the royalty as under. 48. On the issue whether the TPO can come to a conclusion that the ALP of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(TP)A No.1315/Bang/2011 a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India's tax jurisprudence. The Hon'ble Court held that it is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment to ALP. We may also add that the miscellaneous petition is thoroughly misconceived and has been filed without a proper reading of the order of the Tribunal. We hope that such miscellaneous petitions will not be filed by the revenue in future, when the orders in question clearly set out its conclusions. The miscellaneous petition is therefore dismissed. 12. It is also observed that the principle of aggregation has been upheld by various High Courts as well as decision of this Tribunal. Admittedly, the assessee has treated royalty to be closely interlinked with the transactions, which was rejected by the revenue authorities. Reliance has been placed on following decisions in respect of above proposition. a) DCIT vs. Air Liquide Engineering India P Ltd. reported in [2014] 43 taxmann.com 299 (Hyderabad Tribunal) b) Dell International Services India Pvt. Ltd. vs. JCIT in IT(TP)A No. 130/Bang/2014 IT(TP)A No. 121/Bang/2014 dated 22.12.2021 c) McCann Erikson India Pvt Ltd vs. ACIT ITA No.5871/Del/2011 d) M/s. Thyssen Krupp Industries India Pvt Ltd V ACIT ITA No. 7032/Mum/2011 e) Lumax Industries Ltd v ACIT TS-152-ITAT-2013(DEL)-TP. f) Hindustan Unilev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is notified within the specified period. The price charged for the products includes an element the expenditure that is likely to be incurred in meeting the demands for rectification of the defects during the warranty period. Assessee submitted that since the gross amount is reflected as turnover, correct accounting treatment would require that appropriate amount, reflecting the probable charges that the assessee is likely incur, be debited to the profit and loss account. The Ld.AO disallowed the provision towards warranty while computing the book profits under section 115JB of the Act on the ground that it is provision to meet contingent liability and is not an ascertained liability. However, the Ld.AO allowed the same in normal computation. Aggrieved by the order of Ld.AO, the assessee preferred appeal before the Ld.CIT(A) who upheld the view of Assessing Officer. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before us now. 16. It is stated that the liability is of a known nature. Its incurrence is not uncertain. It is a liability in present, though may be discharged at a later date. The past reality and experience is normally a sure guide of the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a defectless product. Assuming that the amount of warranty claiming deduction is actual and not incurred by the assessee, the difference in the amount is taxed in the subsequent year. In that view of the matter and in the light of the law laid down by the apex court as aforesaid, the authorities were justified in allowing the warranty claimed as deduction. However, they have made it very clear that there should not be double deduction and for verifying the same, the matter is remitted back to the authorities which, in the facts of this case, would meet the ends of justice. We do not see any justification to interfere with the said finding passed by the Tribunal. Therefore, we do not see any substantial question of law that would arise for consideration which merits admission of this appeal. Accordingly, appeal is dismissed. 19. Respectfully following the above, we remand this issue back to Ld.AO for verifying if there is any double deduction claimed by assessee. The Ld.AO is directed to carry out necessary verification and consider the claim in accordance with law. Needless to say that proper opportunity of being heard be granted to assessee. Accordingly, this ground raised ..... X X X X Extracts X X X X X X X X Extracts X X X X
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