GKN Driveline (India) Ltd., Faridabad V. DCIT (LTU), New Delhi

ITA 278/DEL/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2736 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 19-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 17-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: MANOJ PARDASANI
• Keywords: Business income; Transfer pricing; Business expenditure; International transaction; Earning of tax free income
• Section: 244A; 234B; 14A; 37(1); 10B; 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I - 1 , NEW DELHI BEFORE SHRI N.K.SAINI , ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER ITA NO. 278 /DEL/201 7 A.Y. 20 1 2 - 13 GKN DRIVELINE (INDIA) LTD. 270, SECTOR 24 FARIDABAD 121 005 PAN: AAACG4276B VS . DCIT (LTU) CIRCLE 1 NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SH. MANOJ PARDASANI, C.A. RESPONDENT BY SH. SANJAY I BARA, CIT, DR . DATE OF HEARING 21 .03.2018 DATE OF PRONOUNCEMENT 28 .03.2018 ORDER PER BEENA A PILLAI, JUDICIAL MEMBER T HE PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST FINAL ASSESSMENT ORDER DATED 29/11/16 PASSED BY LD. DCIT, C IRCLE 1, NEW DELHI UNDER SECTION 143 (3) READ WITH S. 144C (1) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT , UNLESS OTHERWISE SPECIFIED) ON THE FOLLOWING GROUNDS OF APPEAL: 1. TRANSFER PRICING PURCHASE OF RAW MATERIALS AND COMPONENTS. 1 . 1 . ON THE FACTS AND IN LAW, THE LD.JCIT, TPO - 2(1), NEW DELHI (LD.TPO) AND LD.DC IT (LTU) (LD.AO) ERRED IN DETERMINING AND THE HON BLE DRP - 1, NEW DELHI ERRED IN CONFIRMING THE ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 2 ADJUSTMENT OF INR 45,871,453/ - TO THE INTERNATIONAL TRANSACTION OF PURCHASE OF RAW MATERIALS AND COMPONENTS BY NOT APPRECIATING THE JUSTIFICATION/RATIONALE PROV IDED BY THE APPELLANT. 1 . 2 . ON THE FACTS AND IN LAW, THE HON BLE DRP ERRED IN UPHOLDING THE ACTION OF LD.TPO AND LD.AO REGARDING REJECTION OF COST PLUS METHOD (CPM) (USING FOREIGN AE AS THE TESTED PARTY) AND INAPPROPRIATE APPLICATION OF THE TRANSACTIONAL NET M ARGIN METHOD (TNMM) (USING APPELLANT AS THE TESTED PARTY), THEREBY VIOLATING RULE 10B AND RULE 10C OF THE RULES. 1 . 3 . ON THE FACTS AND IN LAW, THE HON BLE DRP ERRED IN CONFIRMING THE ACTION OF THE LD.TPO AND LD.AO REGARDING APPLICATION OF TNMM ON ENTITY WIDE B ASIS AND NOT APPRECIATING TRANSACTION BY TRANSACTION APPROACH FOLLOWED BY THE APPELLANT, EVEN THOUGH THE VALUE OF PURCHASE OF RAW MATERIALS AND COMPONENTS FROM FOREIGN AES CONSTITUTES ONLY 9% OF THE TOTAL OPERATING COSTS INCURRED BY THE APPELLANT. 1 . 4 . ON THE F ACTS AND IN LAW, THE HON BLE DRP ERRED IN UPHOLDING ACTION OF LD.TPO AND LD.AO REGARDING INCORRECT RE - COMPUTATION OF THE OPERATING PROFIT MARGIN OF THE APPELLANT. 2 . TRANSFER PRICING MANAGEMENT CONSULTANCY AND BUSINESS AUXILIARY SERVICES (GSA CHARGES) . 2 . 1 . ON THE FACTS AND IN LAW, BASED ON THE HON BLE DRP DIRECTIONS TO VERIFY COMPLIANCE WITH THE TERMS OF BILATERAL ADVANCE PRICING AGREEMENT ( APA ) SIGNED BETWEEN THE APPELLANT AND CBDT, INDIA IN RELATION TO THE INTERNATIONAL TRANSACTION OF PAYMENT OF GSA CHARGE, THE LD.TPO AND LD.AO ERRED IN DISALLOWING THE AMOUNT OF INR 57,778,305 (I.E. GSA CHARGES ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 3 IN EXCESS OF 5% OF NET SALES), EVEN THOUGH THE SAME IS PENDING REVIEW AND CONSULTATION BETWEEN CBDT AND HER MAJESTY S REVENUE AND CUSTOMS, UK AS PER CLAUSE 6.1 (5) OF APA. 3 . DISALLOWANCE OF PROVISION FOR WARRANTY CLAIMS . 3 . 1 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.AO ERRED IN MAKING A DISALLOWANCE OF INR 13,708,513 RELATING TO PROVISION FOR WARRANTY CLAIMS TREATING THE SAME AS CONTINGENT IN NAT URE. 3 . 2 . THE LD.AO ERRED IN OBSERVING THAT THE AMOUNT OF PROVISION FOR WARRANTY DEBITED TO THE PROFIT AND LOSS ACCOUNT IS NOTIONAL AND IS NOT VERIFIABLE AND ASCERTAINABLE AS PER SCIENTIFIC PRINCIPLES. 3 . 3 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO ERRED IN DISREGARDING THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL (DRP) FOR THE SUBJECT AY WHEREIN THE HON'BLE DRP HAD DIRECTED THE LD. AO TO VERIFY THE METHOD OF WORKING OF THE PROVISION AND THE ALLOW THE SAME IF IT IS BASED ON SOME SCIENTIF IC PRINCIPLE. 3 . 4 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO FURTHER ERRED IN NOT APPRECIATING THE FACT THAT THE PROVISION FOR WARRANTY HAD BEEN MADE ON SCIENTIFIC PRINCIPLE AND IS BASED ON PAST TRENDS. 3 . 5 . ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE, THE LD. AO ERRED IN DISREGARDING THE RULING OF THE HON'BLE DELHI HIGH COURT, IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR ('AY') 1995 - 96 AND AY 1996 - 97 (ITA NO. 929/2005 AND 1054/2005) ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 4 3 . 6 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD . AO ERRED IN DISREGARDING THE JUDGMENT OF HON'BLE SUPREME COURT ('SC'), IN THE CASE OF ROTORK CONTROLS (I) PRIVATE LIMITED VS CIT [314 ITR 62] 4 DISALLOWANCE OF GSA CHARGES 4.1. THE LD . AO HAS ERRED IN FACTS AND IN LAW BY DISALLOWING INR 384,010,443 O N ACCOUNT OF MANAGEMENT CONSULTANCY BUSINESS AUXILIARY SERVICE CHARGES (GSA CHARGES) 4.2. THE LD AO HAS ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE, IN ALLEGING THAT THE PAYMENT FOR GSA CHARGES WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF B USINESS IN TERMS OF SECTION 37(1) OF THE INCOME - TAX ACT, 1961 ('ACT') 4.3 THE LD . AO HAS ERRED IN FACT AND IN CIRCUMSTANCES OF THE CASE, IN NOT FOLLOWING THE SPIRIT OF ADVANCE PRICING AGREEMENT (FOR SUBJECT AY) AND MUTUAL AGREEMENT PROCEDURE (FOR AY 2008 - 09 TO AY 2011 - 12) WHEREBY GSA CHARGES CLAIMED BY THE ASSESSEE WERE HELD AS AN ALLOWABLE BUSINESS EXPENDITURE FOR TRANSFER PRICING PURPOSES SUBJECT TO DETERMINATION OF ARM S LENGTH PRICE AS PER SPECIFIED FORMULA. 5 DISALLOWANCE U/S 14A OF THE ACT . 5.1 O N THE FACTS AND IN LAW, THE LD. AO THE HON'BLE DRP ERRED IN DISALLOWING AMOUNT OF INR 5,987 RELATING TO EXPENDITURE INCURRED FOR EARNING TAX EXEMPT INCOME FROM INVESTMENTS BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES WITHOUT APPRECIATING THAT NO SUCH INCOME HAS BEEN EARNED BY THE APPELLANT COMPANY DURING THE YEAR UNDER CONSIDERATION. ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 5 5.2. ON THE FACTS AND IN LAW, THE LD. AO AND THE HON'BLE DRP ERRED IN DISREGARDING THE JUDGMENT OF HON'BLE JURISDICTIONAL DELHI HIGH CO URT IN THE CASE OF HOLCIM INDIA PRIVATE LIMITED (ITA NO. 486/2014) 6 DISALLOWANCE OF WELFARE EXPENDITURE UNDER THE HEAD MISCELLANEOUS EXPENDITURE . 6.1 THE LD. A.O./ THE HON'BLE D RP ERRED ON THE FACTS AND IN LAW, IN DISALLOWING INR 825,822 RELATING TO EXPENDITURE INCURRED ON WELFARE ACTIVITIES, WHICH INCLUDES EXPENDITURE FOR WELFARE OF FAMILIES OF EMPLOYEES. 6.2 THE LD. AO AND THE HON'BLE D RP FURTHER ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, IN NOT APPRECIATING THE FACT THAT THE AFORESA ID EXPENDITURE WAS INCURRED BY THE ASSESSEE HAS HELPED ESTABLISH ITS SOCIAL IMAGE AND THEREFORE, IS DIRECTLY RELATED TO THE BUSINESS OF THE ASSESSEE. 7 DISALLOWANCE DUE TO STOCK DIFFERENCE 7.1 THE LD. AO ERRED ON THE FACTS AND IN LAW, IN DISALLOWING IN R 84,596,885 ON ACCOUNT OF ACTUAL PHYSICAL LOSS OF STOCK. 7.2 THE LD. AO AND THE HON'BLE D RP FURTHER ERRED ON THE FACTS AND IN LAW, IN NOT APPRECIATING THAT THE LOSS OF STOCK OF RS. 84,596,885 WAS INCIDENTAL TO THE CONDUCT OF ASSESSEE'S BUSINESS AND HENC E WAS AN ALLOWABLE DEDUCTION IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF BADRIDAS OAGA V CIT (34 ITR 10) AND CIT V NAINITAL BANK LTD (55 ITR 707). 7.3 THE LD. AO AND THE HON'BLE D RP FURTHER ERRED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, IN ALLEGING THAT THE CLAIM FOR PHYSICAL LOSS OF STOCK WAS WITHOUT ANY MATERIAL ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 6 EVIDENCE OR PROOF, DISREGARDING REPORT OF THE EXTERNAL CONSULTANT AND BOARD RESOLUTION EVIDENCING THE ACTUAL PHYSICAL LOSS OF INVENTORY SUBMITTED BY THE ASSESSEE. 8 GENERAL GROUNDS 8.1 ON THE FACTS AND IN LAW, THE LD. AO ERRED IN INITIATING THE PENALTY PROCEEDINGS UNDER SECTION 271 (1 )(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS OF INCOME WITHOUT APPRECIATING THE FACTS OF THE CASE. 8.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 2340 OF THE ACT . 8.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN RECOVERING INTEREST ALREADY G RANTED TO THE ASSESSEE UNDER SECTION 244A OF THE ACT THE ABOVE 'GROUNDS OF APPEAL' ARE ALL INDEPENDENT AND WITHOUT PREJUDICE TO ONE AND ANOTHER. THE APPELLANT CRAVES LEAVE TO SUPPLEMENT, TO CANCEL, AMEND, ADD AND/OR OTHERWISE ALTER OR MODIFY, ANY OR ALL, GROUNDS OF THE APPEAL STATED HEREINABOVE. 2 . BRIEF FACTS OF THE CASE ARE AS UNDER : ASSESSEE FILED ITS RETURN OF INCOME DECLARING NIL INCOME ON 27/11/12. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE A CT WAS ISSUED, IN RESPON SE TO WHICH R EPRESENTATIVE S OF ASSESSEE APPEARED BEFORE LD.AO. ON PERUSAL OF AUDIT REPORT, LD. AO OBSERVED THAT ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS A SSOCIATED E NTERPRISES (AES) . AFTER OBTAINING NECESSARY APPROVALS, THE CASE W AS REFERRED TO LD.TPO FOR DETERMINATION OF ARM S LENGTH PRICE. ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 7 3. LD.TPO OBSERVED THAT ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF INSTANT VELOCITY JOINTS. LD.TPO OBSERVED THAT ASSESSEE HA D FOLLOWING INTERNATIONAL TRANSACTION S WITH IT S A.E. SL. NO. NATURE OF TRANSACTIONS VALUE (RS.) METHOD APPLIED ARM S LENGTH RESULT TESTED PARTY RESULT 1. PURCHASE OF RAW MATERIAL & COMPONENTS 581,668,058 COST PLUS METHOD (CPM) - - 2. SALE OF FINISHED GOODS 45,103,917 TRANSACTIONAL NET MARGIN METHOD (TNMM) 0.41% 13.26% 3. ROYALTY ON TECHNICAL KNOW - HOW 19,863,519 COMPARABLE UNCONTROLLED PRICE METHOD (CUP) 5.7% 3% 4. TRADEMARK SUB - LICENSE FEES 97,241,060 CUP 2% 0.5% - 1.5% 5. MANAGEMENT CONSULTANCY AND BUSINESS AUXILIARY SERVICES 384,010,443 TNMM 8.34% 5% 6. INFORMATION SYSTEM/INFORMATION TECHNOLOGY SERVICE RECHARGE 14,248,822 - DO - - DO - - DO - 7. FEES FOR ACCESS TO DRIVELINE E MAIL 1,994,486 OTHER METHOD - - 8. TESTING SERVICES 213,450 - DO - - - 9. REIMBURSEMENT OF EXPENSES 13,740,908 - - - 10. RECOVERY OF EXPENSES 7,020,836 - - - 4 . IT WAS OBSERVED THAT ASSESSEE USED CPM AS MOST APPROPRIATE METHOD FOR BENCHMARKING OF TRANSACTION S RELATED TO PURCHASE OF RAW MATERIALS AND COMPONENTS BY CONSIDERING A SSOCIATED E NTERPRISE AS TESTED PARTY. LD. TPO OBSERVED THAT ASSESSEE ADOPTED TRANSACTION BY TRANSACTION BENCHMARKING ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 8 APPROACH , WHICH WAS BROADLY ACCEPTED BY HIM. THE DETAILS ARE AS UNDER: 1. PURCHASE OF RAW MATERIAL AND COMPONENTS 581,668,058 CPM AES 2. SALE OF FINISHED GOODS 45,103,917 INTERNAL TNMM GKN INDIA 3. ROYALTY ON TECHNICAL KNOW HOW 19,863,519 CUP NA 4. TRADEMARK SUB - LICENSE FEES 97,241,060 CUP NA 5. MANAGEMENT CONSULTANCY AND BUSINESS AUXILIARY SERVICES 384,010,443 TNMM AE 6. INFORMATION SYSTEM/ INFORMATION TECHNOLOGY SE RVICE RECHARGE 14,248,822 TNMM NA 7. FEES FOR ACCESS TO DRIVELINE E MAIL 1,994,486 OTHER METHOD NA 8. TESTING SERVICES 213,450 OTHER METHOD NA 9. REIMBURSEMENT OF EXPENSES 13,740,908 OTHER METHOD NA 10. RECOVERY OF EXPENSES 7,020,936 OTHER METHOD NA 1 1. CORPORATE GUARANTEE NIL OTHER METHOD NA 5. HOWEVER, LD.TPO REJECTED BENCHMARKING ADOPTED BY ASSESSEE IN CASE OF PURCHASE OF RAW MATERIALS AND COMPONENTS AND ALSO SELECTI ON OF A SSOCIATED E NTERPRISE AS THE TESTED PARTY. INSTEAD LD. TPO APPLIED TNMM AS MOST APPROPRIATE METHOD AND CONSIDERED ASSESSEE TO BE THE TESTED PARTY , AS ASSESSEE FAILED TO PROVIDE COMPLETE FINANCIAL DETAILS OF A SSOCIATED E NTERPRISES FOR FINANCIAL YEAR ENDING MARCH , 2012 . LD. TPO AFTER ANALYSING THE FAR OF ASSESSEE OBSERVED A S UNDER: ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 9 1. TAXPAYER HAD AGGREGATED TRANSACTIONS FROM 1 - 9 AND ANALYSED THESE WHILE SERIAL NO 10 WAS SEPARATELY ANALYSED. 2. TPO HAS POINTED OUT THAT TAXPAYER IN ITS FORM 3 C EB FOR FY 2010 - 11 HAD MENTIONED THAT FOR INTERNATIONAL TRANSACTIONS UNDERTAKEN BY GKN INDIA AND THE AES DURING 2010 - 11 RELATING TO L,6,7,AND 9 BELOW IT OPERATED AS A SERVICE PROVIDER AND WAS REMUNERATED ON A COST PLUS BASIS AND THUS THE AE WAS SELECTED AS THE TESTED PARTY. HOWEVER SINCE FINANCIAL DATA OF THE AES PERTAINING TO TRANSACTI ONS AT 1,6, AND 7 WAS NOT AVAILABLE WITH GKN INDIA THUS FOLLOWING THE PRINCIPLE LAID DOWN IN RULE 1OC(2) OF THE INCOME TAX RULE 1962 GKN INDIA WAS SELECTED AS THE TESTED PARTY AND THIS YEAR WITHOUT ANY CHANGE OF FACTS OR BUSINESS MODEL, C PM HAS BEEN USED. 6. LD. TPO HAS STATED THAT FROM FAR ANALYSIS/COMPARISON ASSESSEE HAD LESS COMPLEX OPERATIONS AND LIMITED RISKS AND THUS TNMM WOULD BE THE MOST APPROPRIATE METHOD WITH ASSESSEE AS THE TESTED PARTY. LD. TPO ALSO STATED THAT CPM MARKS - UP ARE HEAVILY INFLUE NCED BY THE PARTICULAR ACCOUNTING CONVENTIONS USED BY AN ENTERPRISE TO CLASSIFY COST OF GOODS SOLD OR OPERATING EXPENSES WHICH MIGHT VARY AMONG UNCONTROLLED PARTIES , A ND RELIABILITY OF CPM COULD ALSO BE ADVERSELY AFFECTED BY FACTORS SUCH AS COST STRUCTURE, BUSINESS, MANAGEMENT EFFICIENCY ETC. 7. FOR THE ABOVE REASONS L D. TPO ADOPTED TNMM AS THE MAM AND ASSESSEE AS THE TESTED PARTY FOR BENCHMARKING THE INTERNATIONAL TRANSACTION RELATED TO PURCHASE OF RAW MATERIALS AND COMPONENTS. 8. ON RAISING OBJECTIONS BEFO RE DRP, DRP OBSERVED AS UNDER: THE TPO HAS POINTED OUT THAT A SUBSET OF THE CHANGE OF MAM INVOLVES CHANGE OF TESTED PARTY ALSO (SINCE T NMM HAS BEEN USED) AND THE REQUIREMENTS OF FACTORS TO BE TAKEN INTO ACCOUNT FOR THE ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 10 SELECTION OF MAM AS GIVEN IN RULE 1 OC OF THE INCOME TAX RULES 1962 INTER ALIA INVOLVES THE AVAILABILITY, COVERAGE, AND RELIABILITY OF THE DATA NECESSARY FOR APPLICATION OF THE METHOD. IN THIS CONTEXT TPO HAS POINTED OUT THAT SUFFICIENT DETAILS WERE NOT AVAILABLE IN THE PUBLIC DOMAIN TO ASCE RTAIN PROFITABILITY OR CARRY OUT THE COMPARABILITY ANALYSIS FOR THE COMPARABLES SELECTED BY THE TAXPAYER, SINCE NEITHER ANNUAL REPORTS NOR DETAILED CALCULATION FOR THE PU WERE AVAILABLE. THE TPO HAS ALSO POINTED OUT THAT THE TAXPAYER HAS REJECTED CERTAIN C OMPANIES ON THE BASIS OF 'NON COMPARABLE PRODUCT', IN THE QUANTITATIVE ANALYSIS, FOR WHICH NO DETAILS WERE AVAILABLE SO AS TO PERMIT THE TPO TO ASCERTAIN THE CORRECTNESS OF THE REJECTION. ACCORDINGLY WE APPROVE THE TPOS ACTION IN REJECTING THE AE AS A TES TED PARTY. THUS AS POINTED OUT BY TPO, THERE WERE DEFECTS IN THE SELECTION OF COMPARABLES, USE OF MULTIPLE YEAR DATA GIVING RISE TO INCORRECT COMPARABILITY, INAPPROPRIATE QUANTITATIVE AND QUALITATIVE ANALYSIS, AND THUS THE ALP HAD NOT BEEN CORRECTLY DETER MINED BY THE TAXPAYER AND IN SUCH CIRCUMSTANCES S. 92C(3)(C) RWS 92CA AUTHORIZE THE TPO TO CALL FOR RELEVANT INFORMATION AND/OR GATHER AND USE SUCH INFORMATION RELEVANT FOR DETERMINING THE ALP WHICH TPO HAS DONE AFTER FOLLOWING DUE PROCESS AS DISCUSSED SUPR A. WE THUS APPROVE THE REJECTION OF THE COST PLUS METHOD ('CPM') (USING FOREIGN AE AS THE TESTED PARTY) AND COMPUTATION OF ALP USING TNMM (WITH ASSESSEE AS THE TESTED PARTY) IN COMPLIANCE OF RULE 1 OB AND RULE 1 OC OF THE INCOME TAX RULES 196 2. 9. LD. DCIT ACCORDINGLY PASSED ORDER BY MAKING ADJUSTMENT OF RS. 42,98,81,893/ - IN RESPECT OF THE ARM S LENGTH PRICE DECLARED ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 11 BY ASSESSEE ON THE INTERNATIONAL TRANSACTION RELATING TO PURCHASE OF RAW MATERIALS AND COMPONENTS FROM AE S. AGGRIEVE D BY THE ADJUSTMENT MAD E BY LD. DCIT, ASSESSEE IS IN APPEAL BEFORE US NOW. 10. GROUND NO.1 LD. AR SUBMITT ED THAT THE OBSERVATIONS BY LD. TPO ARE IMAGINARY AND DEVOID OF FACTS . HE PLACED RELIANCE UPON THE REPLY DATED 13/01/16 FILED BEFORE LD. TPO IN RESPONSE TO THE SHOW CAUSE NOTICE DATED 04/01/2016. 10.1 . LD. AR SUBMITTED THAT ASSESSEE IS A PART OF D RIVESHAFT D IVISION OF GKN GROUP S AUTOMOTIVE BUSINESS SEGMENT. LD. AR SUBMITTED THAT ASSESSEE PURCHASED CERTAIN RAW MATERIALS AND COMPONENTS FROM ITS AE S FOR MANUFACTURING CONSTANT VELOCITY JOINT DRIVESHAFT AUTOM OBILES. HE SUBMITTED THAT IT WAS PRICED AT MANUFACTURING COST PLUS AVERAGE MARK - UP OF 30.02% AND IN ORDER TO DETERMINE THE ARM S LENGTH PRICE ASSESSEE DERIVED THE MARK - UP PERCENTAGE FOR 22 PRODUCTS OF THE D RIVELINE D IVISION W HICH ARE SOLD ONLY TO 100% EXTERNAL CUSTOMERS AND DETERMINED THAT THE AVERAGE COST PLUS MARK - UP EARNED BY D RIVELINE D IVISION WAS 43.58%. HE SUBMITTED THAT BASED ON THIS ANALYSIS ASSESSEE BENCHMARK ED THE INTERNATIONAL TRANSACTION S WITH ITS AE AT ARM S LEN GTH PRICE. LD. AR SUBMITTED THAT ASSESSEE IS INVOLVED IN THE FOLLOWING ACTIVITIES IN INDIA: P ROCUREMENT AND M ANUFACTURING; LOG I STICS; S ALES M ARKETING AND D ISTRIBUTION ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 12 10.2 . I T WAS SUBMITTED BY LD. AR THAT ASSESSEE CANNOT BE TAKEN AS TESTED PARTY DUE TO TH E MAGNITUDE OF FUNCTIONS CARRIED OUT BY ASSESSEE IN INDIA VIS - A - VIS THE ACTIVITIES CARRIED OUT BY AE S. 10.3. ON THE CONTRARY LD. CIT , DR SUBMITTED THAT ASSESSEE HAS FAILED TO FURNISH A SATISFACTORY REPLY IN VIEW OF SELECTION OF AE AS TESTED PARTY AND T HAT THERE IS NO COMPARISON DRAWN OUT BY ASSESSEE IN THE TRANSFER PRI C ING DOCUMENTATION REGARDING THE FUNCTIONS , RISKS AND ASSETS OF ASSESSEE VIS - A - VIS ITS AES. HE ALSO SUBMITTED THAT COMPARABLES THAT HA VE BEEN SELECTED BY ASSESSEE ARE P ERTAINING TO MULT IPLE YEAR DATA. LD.CIT.DR SUBMITTED THAT THOUGH A SSESSING O FFICER ACCEPTED THE AE TO BE TESTED PARTY IN THE OTHER SEGMENTS, IT CANNOT BE CONCLU DED THAT FOR THE SEGMENT RELATING TO PURCHASE OF RAW MATERIALS AND COMPONENTS ASSOCIATED ENTERPRISE CAN B E THE TESTED PARTY TO DETERMINE THE ALP OF THE TRANSACTION. 10.4 . IN REJOINDER , LD.AR PLACED RELIANCE UPON LETTER DATED 12/01/16 BEING THE CONFIRMATION LETTER ISSUED BY THE D IRECTOR OF GKN D RIVELINE H EADQUARTERS WHERE THE INDIVIDUAL GROSS PROFIT MARK S - UP CHARGED BY EACH OF THE SUPPLIERS GROUP COMPANIES TO GKN INDIA HAVE BEEN DETAILED. LD.AR SUBMITTED THAT THIS LETTER HAS BEEN A PART OF THE SUBMISSION DATED 13/01/16, BEING REPLY TO THE SHOW CAUSE NOTICE DATED 04/01/ 2016 MORE PARTICULARLY THE ONE PLACED AT PAGE B - 888 TO B 913 OF PAPER BOOK VOLUME II . 10.5 . WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOTH THE SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. THERE IS NO DISPUTE REGARDING THE POSSIBILITY OF FOREIGN AE TO BE TESTED PARTY FOR THE PURPOSES O F DETERMINING A LP OF INTERNATIONAL ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 13 TRANSACTION. HOWEVER THIS CAN BE ALLOWED SUBJECT TO FULFILMENT OF CERTAIN CONDITIONS BEING: THE TESTED PARTY SHOULD BE THE ONE ON WHICH THE TRANSFER PRICING CAN BE APPL IED IN THE MOST RELIABLE MANNER; THE TESTED PARTY SHO ULD BE THE ONE FOR WHICH RELIABLE COMPARABLES ARE EASILY FOUND AND AVAILABLE ON THE PUBLIC DOMAIN ; 10.6. AS PER OECD GUIDELINES, BY APPLYING THE MOST APPROPRIATE METHOD, IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDIC ATOR IS TESTED. THE CHOICE OF TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS OF THE TRANSACTION. AS A GENERAL RULE, THE TESTED PARTY IS THE ONE TO WHICH A TRANSFER PRICING METHOD CAN BE APPLIED IN THE MOST RELIABLE MANNER FOR WHICH THE M OST RELIABLE COMPARABLES CAN BE FOUND, THAT THIS WILL MOST OFTEN BE THE ONE THAT HAS THE LEAST COMPLEX FUNCTIONAL ANALYSIS. 10. 7 . FR OM THE OECD GUIDELINES AT PARAGRAPH 3.18,CERTAIN RELEVANT PRINCIPLES EMERGE FOR THE PURPOSES OF SELECTING TESTED PARTY: ( A ) TH E CHOICE OF SELECTING TESTED PARTY FOR COMPATIBILITY IS ONLY AVAILABLE IN CUP, TNMM . ( B ) THE TESTED PARTY SHOULD BE THE LEAST COMPLEX PARTY TO THE CONTROLLED TRANSACTIONS. ( C ) AVAILABILITY OF MOST RELIABLE DATA OF THE TESTED PARTY ON THE PUBLIC DOMAIN AND REQUIR EMENT OF MINIMUM ADJUSTMENTS IS ALSO ONE OF THE MOST IMPORTANT ASPECT WHILE SELECTING THE TESTED PARTY. ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 14 ( D ) FAR STUDY OF THE TESTED PARTY SHOULD BE DETAILED BEING LESS COMPLEX VIS - A - VIS THE OTHER ENTITY. 10.8. HOWEVER FROM THE TP DOCUMENTATION FILED BEFORE U S IN THE PAPER BOOK AT PAGE B - 3 TO B - 869 OF PAPER BOOK VOLUME II IT IS OBSERVED THAT ASSESSEE HAS NOT PROVIDED ANY DETAILS REGARDING FAR OF AE TO ASCERTAIN IT TO BE LES S COMPLEX IN NATURE . IN FACT ASSESSEE HAS ONLY FILED A LETTER DATED 12/01/16 WHICH DEM ONSTRATES THE TOTAL SALES EARNED BY AE WITH ASSESSEE DURING FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. IT IS OBSERVED FROM THE SUBMISSION DATED 13/01/16 FILED BY ASSESSEE BEFORE LD. DCIT WHICH IS IN RESPONSE TO THE SHOW CAUSE NO TICE DATED 04/01/ 2016 THAT , ASSESSEE DO NOT HAVE FINANCIALS OF ITS AE AS THE SAME ARE NOT AVAILABLE ON THE PUBLIC DOMAIN. APPENDIX B AT PAGE B - 933 IS PROFITABILITY DETAILS FOR PRODUCTS OF DRIVELINE DIVISION (BEING AES), HAVING 100% EXTERNAL SALES DURIN G THE YEAR ENDED 31/12/11. FURTHER IT IS OBSERVED THAT THE COMPARABLES SELECTED ARE SINGLE SET WITHOUT HAVING REGARD TO THE FUNCTIONS AND GEOGRAPHICAL DISSIMILARITIES. 10. 9 . IT IS FURTHER PERTINENT TO OBSERVE THAT THE MOST APPROPRIATE METHOD USED BY ASS ESSEE AGAINST AE AS TESTED PARTY IS COST PLUS METHOD. WE FAIL TO UNDERSTAND HOW THE MARGINS WOULD BE COMPARABLES IN A COST PLUS METHOD, WHICH IS REQUIRED FOR DETERMIN ING ALP OF AN INTERNATIONAL TRANSACTION. WE ALSO DO NOT SEE ANY REASON TO SET ASIDE THI S ISSUE TO LD.TPO, AS ASSESSEE HAS CATEGORICALLY SUBMITTED BEFORE AUTHORITIES BELOW REGARDING NON - AVAILABILITY OF FINANCIAL DETAILS OF AE. EVEN BEFORE US LD.AR ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 15 DID NOT SUBMIT THERE BEING A POSSIBILITY OF OBTAINING COMPLETE FINANCIAL DETAILS OF A.E. WE THE REFORE REJECT THE ARGUMENTS ADVANCED BY LD.AR IN RESPECT OF SELECTING AE AS THE TESTED PARTY AND CPM AS MAM. 10.10. ACCORDINGLY GROUND NO. 1 RAISED BY ASSESSEE STANDS DISMISSED . 11. GROUND NO. 2 LD.AR SUBMITTED THAT ASSESSEE DO NOT WISH TO PRESS THIS GRO UND . ACCORDING LY THIS GROUND STANDS DISMISSED AS NOT PRESSED . 12. GROUND NO. 3 A SSESSEE HAS RAISED THIS ISSUE AGAINST DISALLOWANCE OF PROVISION FOR WARRANTY CLAIMS. 12.1. LD.TPO WHILE PASSING FINAL ASSESSMENT ORDER OBSERVED THAT ASSESSEE DEBITED A S UM OF RS.2,10,27,486/ - TOWARDS PROVISION FOR WARRANTY CLAIMS. ASSESSEE SUBMITTED THAT THE ISSUE HAS BEEN SETTLED IN FAVOUR OF ASSESSEE FOR THE PRECEDING ASSESSMENT YEARS BY THE ORDERS OF HON BLE HIGH COURT AS WELL AS C OORDINATE B ENCH OF THIS T RIBUNAL, WHIC H WAS DISREGARDED. 12.2. AGGRIEVED BY THE ORDER OF LD. TPO ASSESSEE RAISED OBJECTION BEFORE DRP WHO DIRECTED A SSESSING O FFICER TO VERIFY THE METHOD OF WORKING OF PROVISION FOR WARRANTY AND DIRECTED THAT IF THE SAME IS BASED ON SOME SCIENTIFIC PRINCIPLE S AND ASCERTAINABLE SPECIFICALLY THE SAME SHOULD BE ALLOWED. IT WAS SUBMITTED THAT AS THE MATTER WAS RESTORED BACK TO LD. A.O., LD. AO GAVE PARTIAL RELIEF BEING THE DIFFERENCE BETWEEN PROVISION FOR WARRANTY AND THE CLAIM THAT WAS RAISED DURING THE YEAR UNDER CONSIDERATION , BEING RS. 1, 37, 08,513/ - . ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 16 12.3. AGGRIEVED BY THE FINAL ORDER OF LD. AO, ASSESSEE IS IN APPEAL BEFORE US. HE SUBMITTED THAT THE ISSUE HAS NOW ATTAINED FINALITY BY VARIOUS ORDER S OF THIS T RIBUNAL AS WELL AS HON BLE HIGH COURT. HE PLA CED RELIANCE UPON A RECENT DECISION OF C OORDINATE B ENCH OF THIS T RIBUNAL IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2010 - 11 AND 2011 - 12 IN ITA NO. 1416/ D EL/2015 AND ITA NO. 843/DEL/2016 V IDE ORDER DATED 20/09/17 WHEREIN THIS T RIBUNAL HELD AS UNDER: 13. LD . COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF ASSESSEE FOR ASSESSMENT YEARS 1995 - 96 AND 1996 - 97 AND THEREAFTER FROM ASSESSMENT YEARS 2001 - 02 TO 2009 - 10. HOWEVER, AS REGARDS THE INTERVENING PERIOD I.E. IN ASSESSMENT YEARS 1997 - 98 TO 2000 - 01 THE DATA IS NOT READILY AVAILABLE AND NO CASES ARE PENDING. 14. LD. DR ON THE OTHER HAND SUPPORTED THE ORDER OF THE AO. 15. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH SIDES. WE FIND THE TRIBUNAL IN ASSESSEE S OWN CASE IN ITA NO.3223/DEL/2005 ORDER DATED 14.09.2007 FOR ASSESSMENT YEAR 2001 - 02 HAS HELD THAT PROVISION FOR WARRANTY MADE BY THE ASSESSEE IS ON THE BASIS OF TECHNICAL ESTIMATION AND, THEREFORE, SUCH PROVISION WAS IN RESPECT OF ASCERTAINED LIABILITY AND THE QUAN TIFICATION THEREOF WAS TO BE MADE ON A LATER DATE. ACCORDINGLY, THE TRIBUNAL ALLOWED THE APPEAL OF THE ASSESSEE. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN ASSESSEE S OWN CASE FOR VARIOUS OTHER YEARS. ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 17 16. WE FIND THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD. VS. CIT REPORTED IN 314 ITR 62 HAS HELD THAT AS UNDER : - THE ASSESSEE SOLD VALUE ACTUATORS. AT THE TIME OF SALE THE ASSESSEE PROVIDED A STANDARD WARRANTY WHEREBY IN THE EVENT OF ANY ACTUATOR OR PART THEREOF BECOMING DEFE CTIVE WITHIN 12 MONTHS FROM THE DATE OF COMMISSIONING OR 18 MONTHS FROM THE DATE OF DISPATCH, WHICHEVER WAS EARLIER, IT UNDERTOOK TO RECTIFY OR REPLACE THE DEFECTIVE PART FREE OF CHARGE. RIGHT FROM THE ASSESSMENT YEAR 1983 - 84 THE CLAIM FOR ALLOWANCE OF TH IS WARRANTY HAD BEEN ALLOWED. FOR THE ASSESSMENT YEAR 1991 - 92, IT HAD MADE A PROVISION FOR WARRANTY OF RS.10,18,800/ - AT THE RATE OF 1.5 PER CENT THE TURNOVER. SINCE THIS PROVISION EXCEEDED THE ACTUAL EXPENDITURE, THE ASSESSEE REVERSED RS.5,00,246/ - AS R EVERSAL OF EXCESS PROVISION, AND CLAIMED DEDUCTION OF THE NET PROVISION OF RS.5,18,554/ - . BUT THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT IT WAS MERELY A CONTINGENT LIABILITY. THE HIGH COURT ON APPEAL HELD THAT NO OBLIGATION WAS COST ON THE DATE OF SALE AND CONSEQUENTLY THERE WAS NO ACCRUED LIABILITY. ON APPEAL TO THE SUPREME COURT : HELD, REVERSING THE DECISION OF THE HIGH COURT, THAT THE VALUE ACTUATORS, MANUFACTURED BY THE ASSESSEE, WERE SOPHISTICATED GOODS AND STATISTICAL DATA INDIC ATED THAT EVERY YEAR SOME OF THESE WERE FOUND DEFECTIVE; THAT VALUE ACTUATOR BEING A SOPHISTICATED ITEM NO CUSTOMER WAS PREPARED TO BUY A VALUE ACTUATOR WITHOUT A WARRANT. THEREFORE, THE WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE; IN OTHER WORDS, THE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. IN THIS CASE THE WARRANTY PROVISIONS HAD TO BE RECOGNIZED BECAUSE THE ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE C OULD BE MADE OF THE AMOUNT OF THE OBLIGATION. THEREFORE, THE ASSESSEE HAD INCURRED A LIABILITY DURING THE ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE INCOME - TAX ACT, 1961. THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE THE W ARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIPLE OF ESTIMATION OF THE CONTINGENT LIABILITY IS NOT THE NORMAL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS, THE NATU RE OF SALES, THE NATURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHEN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 18 RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDICATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFA CTURED IN THE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARRANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. 17. RES PECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE AS WELL AS THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD. (SUPRA), WE HOLD THAT THE PROVISION FOR WARRANTY CLAIM IS AN ALLOWABLE EXPENDITURE. T HE GROUND RAISED BY THE ASSESSEE IS ALLOWED AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 12.4. ON THE CONTRARY LD. CIT DR PLACE D RELIANCE UPON ORDER OF LD. AO. 13. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOTH THE SIDES IN THE LIGHT OF THE R ECORDS PLACED BEFORE US. ON PERUSAL OF THE ORDER OF PRECEDING ASSESSMENT YEAR IN ASSESSEE S OWN CASE PASSED BY C OORDINATE B ENCHES OF THIS TRIBUNAL (RELEVANT PARAGRAPHS HA VE BEEN REFERRED TO HEREIN ABOVE) AS WELL AS HON BLE HIGH COURT (PAGE C - 113 TO C114 OF PAPER BOOK), WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE STANDS SETTLED IN FAVOUR OF ASSESSEE. 13.1. RESPECTFULLY FOLLOWING THE SAME , WE ALLOW THIS GROUND RAISED BY ASSESSEE. 14. GROUND NO. 4 AND 5 LD.AR SUBMITTED THAT ASSESSEE DO NOT WISH TO PRESS TH ESE GROUND S. ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 19 14.1. ACCORDINGLY THESE GROUNDS STANDS DISMISSED AS NOT PRESSED . 15. GROUND NO. 6 T HIS GROUND HAS BEEN RAISED BY ASSESSEE AGAINST THE DISALLOWANCE OF WELFARE EXPENDITURE UNDER THE HEAD MISCELLANEOUS EXPENDITURE . ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAS INCURRED CERTAIN EXPENSES AMOUNTING TO RS.8,25, 822 / - ON WELFARE ACTIVITIES. IT WAS SUBMITTED THAT THESE EXPENDITURE WERE INCURRED PRIMARILY TO PROVIDE FOOD AND MILK TO STUDENTS, SALARY TO TEACHERS, TRANSPORTATION CHARGES TO DISABLED STUDENT S ETC TO THE FOLLOWING SCHOOLS/ORGANISATION IN WHICH CHILDREN OF ASSESSEE S FACTORY WORKERS WERE STUDYING: NAIRH (FARIDABAD) ; UDAY S OCIETY FOR D EVELOPMENT, FARIDABAD PRANAB KANYA SANGH, FARIDABAD 15.1 . I T WAS SUBMITTED THAT THESE I NSTITUT IONS/ O RGANISATION S WERE LOCATED WITHIN 5 TO 10 KM OF FACTORY PREMISES WHICH HELPED THE WORKERS OF ASSESSEE. IT WAS SUBMITTED THAT ASSESSEE ACCORDINGLY HAD INCURRED THESE EXPENSES WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS AND WAS ALLOWABLE UNDE R SECTION 37 OF THE ACT. 15.2. BOTH LD. TPO AS WELL AS DRP REJECTED THE CLAIM OF ASSESSEE ON THE GROUND THAT ASSESSEE FAILED TO ESTABLISH ALONG WITH EVIDENCE THAT THE SAID EXPENSES W ERE INCURRED DURING THE COURSE OF BUSINESS OPERATION AND ARE RELATE D WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 20 15.3. AGGRIEVED BY THE ORDER OF LD. AO IN THE FINAL ASSESSMENT ASSESSEE IS IN APPEAL BEFORE US NOW. LD.AR PLACED RELIANCE UPON VARIOUS JUDICIAL PRONOUNCEMENTS WHICH ARE AS UNDER: RAJASTHAN SPG. AND WVG. MILLS LTD., 281 ITR 408 (RAJASTHAN HC) INDIA RADIATORS, 236 ITR 719 (MADRAS HC) MAHINDRA AND MAHINDRA LTD., 261 ITR 501 (BOMBAY HC) ALUMINIUM CORPORATIONS, 86 ITR 11 (SC) 15.4. HE SUBMITTED THAT THESE WERE TO FACILITATE WORKERS OF ASSESSEE EMPLOYED AT FACTORY AND ARE ALLOWABLE EXPENSES, AS THEY HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ASSESSEE S BUSINESS. HE SUBMITTED THAT THESE WERE TO BENEFIT THE WELFARE OF THE CHILDREN OF STAFF. 15.5. ON THE CONTRARY LD. CIT DR SUBMITTED TH AT IN THE ABSENCE OF DETAILS, THESE EXPENSES COULD NOT BE ALLOWED. 15.6. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOTH THE SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US . 15.7. IN OUR CONSIDERED OPINION THE EXPENDITURE INCURRED BY ASSESSEE IS IN THE NATURE OF CORPORATE SOCIAL RESPONSIBILITY WHICH IS CONSIDERED TO BE AN ALLOWABLE EXPENDITURE SUBJECT TO FULFILMENT OF THE CONDITIONS SPECIFIED IN SECTION 32 TO 36 OF THE ACT. AS ASSESSEE HAS NOT FILED ANY DETAILS REGARDING THESE EXPENSES BEFORE US, WE ARE UNABLE TO ASCERTAIN WHETHER NECESSARY CRITERIA AS STIPULATED UNDER SECTION 32 - 36 OF THE A CT ST ANDS FULFILLED. 15.8. WE ARE THEREFORE INCLINED TO SET ASIDE THIS ISSUE BACK TO THE FILE OF LD. AO FOR DUE VERIFICATION. ASSESSEE IS DIRECTED TO FI LE ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 21 ALL NECESSARY DOCUMENTS/PROOF/EVIDENCES IN ORDER TO ESTABLISH ALLOWABILITY OF THESE EXPENSES AS PER SECTION 32 - 36 OF THE A CT. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. 16. GROUND NO. 7 IS IN RESPECT OF DISALL OWANCE DUE TO DIFFERENCE IN THE STOCK. 16.1. DURING THE COURSE OF THE ASSESSMENT PROCEEDING S IT WAS NOTICED IN THE NOTES TO THE ACCOUNT S RECORDED BY AUDITORS THAT: W E DRAW YOUR ATTENTION TO N OTE 40 TO THE FINANCIAL STATEMENTS REGARDING PHYSICAL VER IFICATION OF INVENTORY CARRIED OUT BY THE MANAGEMENT SUBSEQUENT TO THE YEAR END, RESULTING IN SHORTAGES ON ACCOUNT OF SHORT BOOKING OF SCRAP, PRODUCTION REPORTING ERRORS, USE OF ALTERNATE BILL OF MATERIALS ETC . A MOUNTING TO RS.8,45,96,85/ - FOR WHICH MANA GEMENT HAS MADE THE ADJUSTMENT IN THE BOOKS. 16.2. ASSESSEE WAS CALLED FOR TO PROVIDE THE DETAILS IN RESPECT OF THE SAME. 16.3. ASSESSEE SUBMITTED THAT MANAGEMENT TOOK STEPS TO PLUG - IN DISCREPANCIES , THAT W ERE OBSERVED FOR THE YEAR UNDER CONSIDERA TION AND NECESSARY ACTION WERE TAKEN. 16.4. LD. AO OBSERVED THAT ASSESSEE DID NOT REGISTER ANY FIR FOR LOSS OF PHYSICAL STOCK OR USE OF ALTERNATE BILL OF MATERIALS. HE THEREFORE BY PLACING RELIANCE UPON NOTES AS MENTIONED IN THE AUDIT REPORT , DISALL OWED CLAIM OF ASSESSEE. 16.5. AGGRIEVED BY THE ADDITION MADE , ASSESSEE RAISED OBJECTION S BEFORE DRP . THE DRP CONFIRMED THE ACTION OF A SSESSING O FFICER. 16.6 . AGGRIEVED BY THE ORDER OF LD. AO IN THE FINAL ASSESSMENT ASSESSEE IS IN APPEAL BEFORE U S. ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 22 16.7 . LD. AR SUBMITTED THAT A BOARD RESOLUTION HAS BEEN PASSED IN ORDER TO STRENGTHEN THE INTERNAL & EXTERNAL CONTROLS, AND CORRECTIVE MEASURES HAVE BEEN ADOPTED TO IDENTIFY MISMATCH OF INVENTORIES. HE THUS SUBMITTED THAT THESE WERE GENUINE LOSSES. 1 6.8. ON THE CONTRARY LD. CIT DR SUBMITTED THAT ASSESSEE HAS MADE UP A STORY REGARDING THE LOSS OF STOCK. HE SUBMITTED THAT HAD THE STOCK BEEN GENUINE, ASSESSEE WOULD HAVE DEFINITELY CLAIMED INSURANCE UPON LOSS . HE PLACED RELIANCE UPON SPECIFIC OBSER VATIONS OF DRP WHEREIN CLAIM OF ASSESSEE REGARDING REVERSAL OF CEN V AT CREDIT WAS NEGATED ON THE BASIS OF THE DOCUMENTS REVIEWED BY DRP. LD. CIT DR SUBMITTED THAT THESE ARE BOGUS LOSSES CREATED BY ASSESSEE AND DESERVE TO BE DISALLOWED. 17. WE HAVE PER USED THE SUBMISSIONS ADVANCED BY BOTH THE SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. LD. AR PLACED RELIANCE ON THE FOLLOWING DECISIONS : NAINITAL BANK LTD., 55 ITR 707 (SC) ANNAMELIA CHETTIAR, 86 ITR 607 (SC) MOTAMAL JETHUMAL, 15 ITR 155 (PATNA H C) HIRALAL PHOOLCHAND, 15 ITR 205 (ALLAHABAD HC) HOPKINS AND WILLIAMS (TRAVENCORE) LTD., 64 ITR 76 (KERALA HC) POHOOMAL BROS, 34 ITR 64 (BOMBAY HC) 17.1. HE SUBMITTED THAT THERE HAVE BEEN SITUATIONS WHERE SUCH LOSS HAS BEEN ALLOWED BY VARIOUS C OURTS AND HON BLE SUPREME COURT. ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 23 1 7.2 . WE HAVE PERUSED THESE DECISIONS RELIED UPON BY LD. AR . HOWEVER THESE ARE FACTUALLY VERY MUCH DIFFERENT FROM THAT OF THE ASSESSEE BEFORE US. HEAVY RELIANCE HAS BEEN PLACED BY ASSESSEE ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF NAINITAL B ANK LTD . (SUPRA). ON PERUSAL OF THE DECISION , IT IS OBSERVED THAT REASON FOR LOSS OF STOCK THEREIN WAS DUE TO THEFT AND DACOITY. IT WAS OBSERVED THAT ASSESSEE THEREIN FILED FIR IN RESPECT OF THE SAME AND THEREFORE IT WAS ALLOWED AS A TRADING LOSS. 1 7.3. IN THE FACTS OF THE PRESENT CASE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE EXACT REASON OF LOSS AND MEASURES TAKEN IN ORDER TO COMPENSATE FOR THE LOSS OF STOCK. WE ARE THEREFORE UNABLE TO APPRECIATE THE ARGUMENTS ADVANCED BY L D. AR . 17.4. ACCORDINGLY WE DISMISS THIS GROUND RAISED BY ASSESSEE. 18. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.03.2018 . SD/ - SD / - ( N.K.SAINI ) (BEENA A PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 28 TH MARCH, 201 8 . MV ITA NO. 278/DEL/17 A.Y. 2012 - 13 GKN DRIVELIN E (INDIA) LTD. VS. DCIT (LTU) 24 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GUARD FILE BY ORDER ASST. REGISTRAR ITAT, DELHI BENCHES, NEW DELHI