2017 (8) TMI 1565 - AT - Income Tax

TP adjustment - Addition as operating income on liability written back and doubtful debts written back - HELD THAT - Similar issue stands decided by the Tribunal of Delhi Bench in the case of Sony India Pvt. Ltd. 2008 (9) TMI 420 - ITAT DELHI-H and in favour of the assessee. Thus it is a settled issue that such liability written back amount as discussed in the said paras falls in the ambit of the provisions of section 28 to 43 of the I.T. Act and therefore in the scope of business profits of the assessee. Same is the reasoning so far as the write back of the Doubtful Debts are concerned. This write back logic has parity with that of the write back of the liabilities. Authorised Representative also raised an argument stating that favourable adjustment of the expenditure claimed way of provision of Doubtful Debts debited to profit and loss account if given benefit to the assessee while calculation of operating cost the resultant ratio of OP/OC of the assessee is within the range of /-5%. Thus for all the reasons discussed above the order of the CIT(A) is fair and reasonable on these 3 items and therefore the relevant limbs of the ground raised by the Revenue are dismissed. Miscellaneous Income - designs income and other services income is directly linked to the core activities of the assessee. Therefore we support the view of the CIT(A) on these items. Ld. DR could not file any evidence to hold it otherwise. Therefore on hearing both the sides we find the conclusion given by the CIT(A) on this issue of inclusion of Miscellaneous income as part of the operating profit is fair and reasonable and it does not call for any interference. Thus the ground No.3 raised by the Revenue has to be dismissed in view of the above discussion and findings of the CIT(A). Computation mechanism for Arm s Length Price given in 2nd Proviso to section 92C(2) read with Rule 10B(1)(E) - HELD THAT - AO/TPO have erred in making addition on this account while the difference in Operating profit/Operating cost figures are within the range of /-5% of the OP/OC of the assessee. The statute allows the same. Therefore we are of the considered view that the order of CIT(A) is fair and reasonable and it does not call for any difference. Accordingly Ground No.1 raised by the Revenue is dismissed. Allowing of warranty provisions - HELD THAT - The claim of the assessee on account of warranty provision is allowed by the Tribunal in assessee s own case in the A.Y. 2003-04. Ld. Departmental Representative has not brought anything on record to controvert the above finding of the Tribunal. Therefore we find that the order of CIT(A) is in tune with the decision of the Tribunal. Therefore the decision of the CIT(A) given is fair and reasonable and it does not call for any interference. Accordingly Ground No.2 raised by the Revenue is dismissed.

Summary

Issues Involved:
1. Treatment of certain income items as operating or non-operating income for Transfer Pricing (TP) purposes for the A.Y. 2002-03.
2. Calculation of Arm’s Length Price (ALP) for the A.Y. 2004-05.
3. Allowability of warranty provisions for the A.Y. 2004-05.

Issue-wise Detailed Analysis:

1. Treatment of Certain Income Items as Operating or Non-Operating Income for TP Purposes (A.Y. 2002-03):

The Revenue challenged the CIT(A)'s decision regarding the classification of various income items as operating or non-operating for TP purposes. The items in dispute included liabilities written back, doubtful debts written back, and miscellaneous income. The assessee argued these should be considered operating income because they are directly related to the business operations. The CIT(A) had agreed with the assessee, including these items as operating income, while excluding interest on fixed deposits, income-tax refunds, and profit on the sale of assets as non-operating income. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi Tribunal's decision in Sony India Pvt. Ltd. and confirming that such items fall within the scope of business profits under sections 28 to 43 of the I.T. Act.

2. Calculation of Arm’s Length Price (ALP) (A.Y. 2004-05):

The Revenue contested the CIT(A)’s computation mechanism for ALP, arguing that the relief granted was improper. The CIT(A) found that the assessee's operating profit/total cost (OP/OC) ratio of 10.70% was within the permissible range of +/-5% from the ALP determined by the TPO, which was 13.87%. Consequently, the CIT(A) deleted the TP adjustment of Rs. 8,03,84,164/-. The Tribunal agreed with the CIT(A), noting that the difference in OP/OC was within the statutory margin, thus no adjustment was necessary.

3. Allowability of Warranty Provisions (A.Y. 2004-05):

The Revenue also disputed the CIT(A)’s decision to allow the warranty provisions, arguing they were contingent in nature. The Tribunal referenced its earlier decision in the assessee's own case for A.Y. 2003-04, which allowed the deduction for warranty provisions. The Tribunal reiterated that the provision for warranty, being a recognized accounting practice and systematically followed by the assessee, should be allowed as a deduction. The Tribunal upheld the CIT(A)'s decision, finding it aligned with the Supreme Court's ruling in Rotork Controls India P. Ltd. vs. CIT.

Conclusion:

The Tribunal dismissed the appeals of the Revenue and the cross objections of the assessee for both assessment years under consideration. The decisions of the CIT(A) were upheld, confirming the treatment of certain income items as operating income for TP purposes, the computation of ALP within the permissible range, and the allowability of warranty provisions. The order was pronounced in open court on August 24, 2017.