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Facts
The Revenue appealed against the CIT(A)'s order concerning AY 2017-18. The case involved adjustments for international transactions, specifically the export of traded spares, and disallowances related to project provision costs and actuarial valuation gains.
Held
The Tribunal held that the Cost Plus Method adopted by the TPO for benchmarking international transactions was incorrect, favoring the assessee's use of the TNMM method as previously decided in its own case. The disallowance of actuarial valuation gain was sustained, while the deletion of disallowance for project provision cost was upheld.
Key Issues
Whether the Cost Plus Method is the most appropriate method for benchmarking international transactions involving export of traded spares, and whether disallowances for project provision costs and actuarial valuation gains are justified.
Sections Cited
143(3), 144C(3), 144B, 143(2), 142(1), 92CA(3), 37(1)
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Income Tax Appellate Tribunal, PUNE BENCHES “C”, PUNE
Before: DR.MANISH BORAD & MS. ASTHA CHANDRA
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
This appeal at the instance of Revenue pertaining to A.Y. 2017-18 is directed against the order dated 19.06.2024 passed by CIT(A)-13, Pune arising out of Assessment order dated 24.06.2021 passed u/s.143(3) r.w.s.144C(3) r.w.s. 144B of the Income-tax Act, 1961 (in short ‘the Act’).
Brief facts of the case are that assessee is a subsidiary of Alfa Laval AB, Sweden, which holds 98.20% equity stake in the assessee company. It is a leading supplier of plate and spiral exchangers, centrifugal separators and decanters, sanitary flow products and complete project and systems in India. Income of Rs.217,55,40,530/- declared in the return for A.Y. 2017-18 furnished on 30.11.2017. Case selected for scrutiny assessment under CASS and notices u/s. 143(2) and 142(1) of the Act were validly served upon the assessee company. Based on the reference made by the Assessing Officer to the Transfer Pricing Officer for computation of Arm's Length Price (ALP) in relation to the international transaction with its Associate Enterprises, the Transfer pricing Officer (TPO) vide order dated 28.01.2021 passed u/s.92CA(3) made an adjustment of Rs.1,74,45,091/- to the international transaction relating to the export of traded spares to the AE. Thereafter, NFAC Delhi passed the Assessment Order u/s.143 r.w.s.144C(3) of the Act on 24.06.2021 making additions/disallowances assessed the income at Rs.2,29,81,09,549/-. Details of additions are given below :
Sr. Particulars Amount (Rs.) No. 1 T.P. Adjustment as per order 1,74,45,091 u/s.92CA(3) 2 Disallowance of project provision 3,97,50,388 costs 3 Disallowance of claim of 37,89,868 deduction on account of Ind AS 4 Disallowance of Information 6,15,83,672 Technology expenses Total 12,25,69,019
Being aggrieved by the assessment order passed by the AO, assessee preferred appeal before the ld.CIT(A) and partly succeeded. Against the part relief granted by the ld.CIT(A), Revenue is now in appeal before this Tribunal by raising the following grounds of appeal :
“1(a). On the facts and circumstances of the case, the Ld. CIT(A) erred in holding that the domestic market segment and the export market segment were distinct and not comparable and thereby, the application of the cost-plus method adopted by the TPO was incorrect. 1(b). On the facts and circumstances of the case, the Ld. CIT(A) erred in rejecting CPM as most appropriate method for benchmarking the transaction of 'export of traded spares', without taking cognizance of the categorical finding given by TPO in Para 41 of his order that the assessee is engaged in re-sale of traded spares imported mainly from AES & Deemed AEs and therefore benchmarking has to be based on gross profits. 1(c) On the facts and circumstances of the case, the l.d. CIT(A) erred in rejecting CPM as most appropriate method for benchmarking the transaction of 'export of traded spares, without taking cognizance of the categorical finding given by TPO in Para 40 of his order that 'there is internal comparable available, in the shape of assessee's sales of traded spares in the domestic market. Given the fact, that such segmental computation of profitability is from within the assessee's own company/operations, there cannot be any problem in computing the gross profitability in respect of each of these segments with needed degree of reliability.
2. On the facts and circumstances of the case, the Id. CIT(A) erred in deleting the disallowance of project provision cost of Rs.3,97,50,388/- by holding that the same was allowed in subsequent years and earlier assessment years in assessee's own case ignoring the fact that assessee had failed to substantiate its claim of having actually the expenses with documentary proof during the assessment proceedings.
3. On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of Rs.28,24,761/ on account of gain on actuarial valuation ignoring the fact that the assessee has deducted the gain from the computat6ion of income without offering the same in the P&L A/c first, which has resulted in double deduction.
The appellant craves leave to add to, amend, alter any of the above grounds of appeal.”
4. At the outset, ld. Departmental Representative fairly accepted that the Revenue deserves to succeed on ground No.3 regarding disallowance of Rs.28,24,761/- made on account of gain on actuarial valuation, accepting that the assessee has inadvertently claimed double deduction. Therefore, disallowance of Rs.28,24,761/- is sustained and ground of appeal No.3 raised by the Revenue is allowed.
Apropos to grounds of appeal No.1(a), (b), and (c) wherein Revenue has raised the issue that ld.CIT(A) erred in rejecting Cost Plus method (CPM) adopted by the TPO for calculating the ALP of the international transaction relating to export of traded spares to the Associated Enterprises, at the outset, Ld. Counsel for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of this Hon’ble Tribunal in assessee’s own case for A.Y. 2013-14 in order dated 20.06.2019.
6. On the other hand, ld. Departmental Representative failed to controvert the contentions made by ld. Counsel for the assessee by placing any other binding precedent in its favour.
We have heard the rival contentions and perused the record placed before us. The assessee which is a subsidiary of Alfa Laval AB, Sweden holds 98.20% equity stake in the assessee company during the year. Assessee is a leading supplier of plate and spiral exchangers, centrifugal separators and decanters, sanitary flow products etc. During the year under consideration it entered into various international transactions with its AE and the ALP was calculated applying Transactional Net Margin (TNMM) method. However, ld. TPO was of the view that Cost Plus method using internal comparables is the most appropriate method. Ld. TPO also observed that the assessee company has joint facility arrangement and a long term buy and supply arrangement through which a manufacturing facility has been created in India through which equipments are sold to the AE on a year on year basis and also in the domestic market. Since the goods manufactured in India are exported to AE as well as sold in the domestic market, ld. TPO was of the view that Cost Plus method is the most appropriate method for benchmarking the international transaction relating to export of equipments to AE. We further observe that ld. CIT(A) granted relief to the assessee following the decision of this Tribunal taken in assessee’s own case for past years. The latest one for A.Y. 2013-14 vide order dated 20.06.2019 deals with the very same issue and this Tribunal has held that the claim of the assessee of adopting TNMM for calculating the ALP for the international transaction deserves to be allowed in light of the settled legal proposition in favour of the assessee and also observing that the comparison of profit margin of export market segment with that of domestic market segment is not proper. Thus, respectfully following the same, we hold that Cost Plus method adopted by the TPO deserves to be rejected and held to be unsustainable. Therefore no interference is called for in the finding of ld.CIT(A). Grounds of appeal No.1(a),(b), and (c) raised by the Revenue are dismissed.
8. Ground No.2 raised by the Revenue is against the deletion of disallowance of project provision cost of Rs.3,97,50,388/-.
9. Ld. Departmental Representative supported the order of ld. TPO whereas ld. Counsel for the assessee relied on the finding of ld.CIT(A) and further stated that the assessee is consistently following the accounting system of adding back the provisions made for the projects and deducting the reversal of provision of projects on year to year basis. During the year under consideration also, assessee has disallowed provision for project cost at Rs.4,53,04,267/- and has also added the reversal of provision of Rs.3,97,50,388/-. Ld. AO has accepted the disallowance of provision of project cost has denied the deduction of the reversal of provision of project cost. Reference was further made to the preceding assessment and subsequent assessment years computation of income where also this methodology has been adopted.
10. We have considered the rival contentions and perused the record placed before us. Revenue is aggrieved with the finding of ld.CIT(A) who has deleted the disallowance made by the TPO for the claim of reversal of provision of project cost of Rs.3,97,50,388/-. We observe that the assessee has been consistently following this method and gave the following written submissions before ld.CIT(A) :
“2.1 "It is respectfully submitted that our company accounts for various provisions such as Liquidated Damages, Warranty, Project Cost, Trade Receivables Doubtful of recovery, etc. At each Balance Sheet date these provisions get reversed, actual expenditure gets booked against these provisions based on invoices received and actual outlay, and new provisions are made based on new estimates. This results in net increase/decrease in total amount of provision at end of each financial year. Our Company consistently follows policy of disallowing incremental provision and claims deduction for decrease in net provisions.
2.2 Your Honour will appreciate from the Computation of Income that our company has disallowed the incremental provisions ie. added back the new provision and reversal if any of the opening provision is claimed as deduction thereby only net amount is considered for disallowance.
Provision Disallowance (A) Allowance (B) Net (A-B) Provision for 4,53,04,267 3,97,50,388 55,53,879 Project Cost
Your Honour may appreciate the fact that only net amount is considered while allowing or disallowing the provisions by the assessing officer while passing the order ignoring the amount of disallowance amounting to Rs. 4,53,04,267/-. And for the presentation the same has been bifurcated into disallowance of current provision vs allowance of reversals if any.
2.3 Hence, we request Your Honour to direct the learned Assessing Officer to delete the above disallowance made.
2.4 Further the chart of movements of Project Provision cost is as follows :
AY Opening Closing Difference Amount Amount Net Effect of Balance Balance (B-A) Disallowed Allowed Allowance & (A) (B) (new (Reversed/ Disallowance provision) Write Off) 2017- 18,18,11,930 18,73,65,809 55,53,879 4,53,04,267 3,97,50,388 55,53,879 18
Your Honour may appreciate from above that our company is consistently following the practice of disallowing incremental provision and claims deduction for decrease in net provisions over the years.
2.5 Also, it is submitted that the similar treatment was given to project provision costs in AY 2020-21 and AY 2021-22 which has been accepted by the learned AO during the respective assessment proceedings. However, for the relevant AY 2017-18 & 2018-19, due to presentation issue ie, allowance & disallowance on different sides, the learned AO only disallowed the allowance claim.
2.6 Without prejudice to above submission, we humbly wish to bring it to Your Honour's notice that there exists an alternate judicial view that such provisions are entitled for deduction u/s 37 of the Act, as and when the provision is recognized. For this reliance can be placed on the decision of Hon'ble Supreme Court in case of Rotork Controls India (P.) Ltd. Vs CIT [2009] 314 ITR 62 (SC) wherein it was held:
Section 37(1) of the Income-tax Act, 1961 Business expenditure- Allowability of Assessment years 1991-92 to 1994-95 Whether for a provision to qualify for recognition, there must be a present obligation arising from past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible Held, yes Whether if historical trend indicates that in past large number of sophisticated goods were being manufactured and defects existed in some of items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from gross receipts under section 37(1), provided data is systematically maintained by assessee - Held, yes.
Without prejudice to above, if Your Honour considers to disallow the deduction claimed on account of Estimated project cost Rs. 3,97,50,388/then it is humbly submitted that the voluntary disallowance made on account of same should also be ignored and taxable profit to that extent should be reduced Le. by Rs. 4,53,04,267/- as it will be unreasonable and against principle of natural justice. Your Honour can refer table mentioned in Point no. 2, where the disallowance made by our company is at Rs. 4,53,04,267/- and allowance of Rs. 3,97,50,388/ The above figures are also verified through the computation of income of our company is enclosed herewith as Annexure-2 for Your Honour's reference
We further notice that ld.CIT(A) after examining the facts of the case and the consistent Accounting Policy of making the provisions and reversal of the provision of project cost based on the scientific working, allowed the claim of expenditure of Rs.3,97,50,388/- observing as follows :
“Findings 4.3 I have carefully considered the facts of the case and submission filed by the appellant. I agree with the appellant's contention that Appellant Company consistently follows policy of disallowing incremental provision and claims deduction for decrease in net provisions. Further, from verification of computation of income it is seen that the appellant company has disallowed Rs. 55,53,879/ one a net basis (disallowance of Rs 4,53,04,267/- net of write back of Rs. 3,97,50,388/-). The Appellant has submitted that similar treatment was given to project provision costs in AY 2020-21 and AY 2021-22 which has been accepted by the learned AO, Assessment Unit, NFAC. Similarly it is accepted in earlier years also.
4.4 It can be seen that the Appellant has disallowed the provision made during the year. Similarly such provision made in earlier years has also been added back. In such case, the write back of such provision has to be allowed as a deduction. Considering this factual position, I am inclined to agree with the Appellant. The Appeal is allowed on this ground.”
The above finding of ld.CIT(A) remains uncontroverted by the ld. DR and we therefore fail to find any infirmity in the same since the AO has not disputed the adding back of the provision of project cost but has only questioned the reversal of provision of project cost. Ground No.3 raised by the Revenue is dismissed.
In the result, the appeal of the Revenue is partly allowed.
Order pronounced on this 29th day of April, 2025.