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2017 (10) TMI 1440 - AT - Income TaxTP adjustment - exclusion of amounts written back for computing the operating margin of the assessee - HELD THAT - In the case of Gillete Diversified Operations Pvt. Limited 2016 (4) TMI 1349 - ITAT DELHI the Co-ordinate Bench of the Tribunal Delhi had decided the issue in favour of the assessee and held that if the reversal of provision / write back is on account of revenue in nature it should be included as part of operating income and if the liabilities originally created were on account of capital items then their write back cannot be considered to be a normal instances of business and hence to be excluded as operating income. The aforesaid order of the Tribunal has also been accepted by the Revenue as no appeal on the issue that whether write back is to be excluded for working out the operating profits has been preferred by the Revenue before the Hon ble Delhi High Court meaning hereby that the issue of write back is to be considered as part of operating income has attained finality. Before us Revenue has also not placed any contrary binding decision in its support. Also in the case of Sony India (P) Ltd 2018 (7) TMI 825 - ITAT DELHI hold that the amount of write back of Rs. 37.49 crores which is on account of amounts written back of expenses / liabilities is to be considered as part of operating income. Before us assessee also submitted that if the write back amount of Rs. 37.49 crores is included as operating income the operating margin would works out to 42.94% as against the operating margin of 14.36% of the comparable companies and therefore the transactions of the assessee with it s A.E s would be at arms length requiring no adjustment to the income. We find that on this issue there is no finding of TPO. We therefore for the limited purpose of verifying the aforesaid contention of assessee remit the issue to the file of TPO - Ground of the assessee is allowed for statistical purposes. provision for warranty expenses disallowance u/s 37 - provision @ 1.15% of the total sales turnover uniformly on all the products - unascertained liability and not an accrued liability - contingent liability - HELD THAT - We find that identical issue arose in assessee s own case in earlier years. The AO was directed by the Co-ordinate Bench of Tribunal to decide the issue after examining the nature of business nature of products manufactured past history of warranty claims methods adopted by the assessee for acquiring the provision and decide the issue keeping in mind the decision in the case of Rotork Controls India (P) Limited Vs. CIT 2009 (5) TMI 16 - SUPREME COURT OF INDIA . The issue is identical to that of earlier years of assessee and since in earlier year the issue was remitted back to AO we therefore for similar reasons restore the issue back to the file of AO to decide the issue afresh. - Appeal of the assessee is allowed for statistical purpose.
Issues Involved:
1. Transfer Pricing Adjustment 2. Erroneous Rejection of Transactional Analysis 3. Erroneous Computation of Operating Profits 4. Erroneous Inclusion/Rejection of Comparables 5. Disallowance of Warranty Costs Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue was the transfer pricing adjustment of Rs. 18.99 crores made by the AO, which the assessee contested, arguing that the international transactions did not violate the arm's length principle as per the Income-tax Act, 1961. The Dispute Resolution Panel (DRP) modified the operating margin of the assessee to (23.18%) from the TPO's 14.36%, but the assessee appealed against this adjustment. 2. Erroneous Rejection of Transactional Analysis: The DRP/AP applied the Transactional Net Margin Method (TNMM) at an entity level, which the assessee argued was contrary to the Indian Transfer Pricing Regulations (ITPR). The assessee contended that the audited segmental profitability statement and price level comparability analysis were not considered, which would have shown the profit earned from respective international transactions separately. 3. Erroneous Computation of Operating Profits: The AO excluded amounts/liabilities written back of Rs. 37.84 crores from the operating income, arguing that they were mere accounting entries not related to the company's operations. The assessee contended that these write-backs were part of normal business operations and should be included in the operating margin. The DRP upheld the AO's decision, but the Tribunal found merit in the assessee's argument, referencing similar cases like Sony India (P) Ltd. and Gillete Diversified Operations Pvt. Ltd., where such write-backs were considered part of operating income. The Tribunal directed the TPO to verify the assessee's claim that the operating margin would be 42.94% if the write-back amounts were included, which would mean no adjustment was necessary. 4. Erroneous Inclusion/Rejection of Comparables: The DRP/AO rejected the assessee's plea to consider Schlafhorst Engineering (India) Limited as a comparable, citing its loss-making status, and included Lakshmi Machine Works Ltd., despite differences in scale and market positioning. The Tribunal did not specifically address this issue as it became academic once the primary issue of operating income computation was decided in favor of the assessee. 5. Disallowance of Warranty Costs: The AO disallowed Rs. 52.19 lakhs claimed as warranty expenses, arguing that the provision was an unascertained liability and not an accrued liability. The DRP upheld this decision. However, the Tribunal noted that a similar issue in the assessee's earlier years was remitted back to the AO for a detailed examination in light of the Supreme Court's decision in Rotork Controls India (P) Ltd. The Tribunal directed the AO to re-examine the warranty expenses claim, considering the nature of the business, past warranty claims, and methods for quantifying the provision, and to pass a speaking order after considering all relevant factors. Conclusion: The Tribunal allowed the appeal for statistical purposes, directing the TPO to verify the inclusion of write-back amounts in operating income and the AO to re-examine the warranty expenses claim. The other grounds related to transfer pricing were rendered academic and required no further adjudication.
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