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2016 (5) TMI 1524 - AT - Income TaxTP Adjustment - Tribunal had directed the AO to accept the pricing of thee international transaction of the assessee for the impugned year to be at arms length if similar transactions with AEs were accepted by the TPO to be at arms length for previous years relevant to A. Ys. 2007-08 and 2008-09 - TPO had pursuant to the DRP directions passed an order not complying with the directions of the DRP and AO had therefore persisted with the same adjustment that he had done earlier - HELD THAT - It is clear that the directions of the DRP is binding on the AO. No doubt as per Section 92CA(4) of the Act an AO has to compute total income in conformity with the arms length price determined by the TPO. However once there is an order of DRP AO is bound by the directions of the DRP by virtue of sub-section (1) to Section 144C of the Act. AO is not required to refer the matter which has been decided by the DRP to the TPO again. We are therefore of the opinion that the addition made by the AO without considering the directions of the DRP reproduced by us above cannot stand in the face of the clear legal mandate. We delete such additions. Disallowance of warranty provision - whether assessee had made the provisioning for warranty in a scientific manner - assessee doing the business of sale of laptops and desktops - HELD THAT - Expenditure incurred against warranty given on sales made in any given year would be reflected in the succeeding year when the provisioning is done on the basis of machine months. Assessee had done the provisioning based on machine months. If by application of the formula of multiplying machine months with repair action rate and cost per claim an excessive warranty provisioning had resulted then definitely in the succeeding year the expenditure incurred on warranty would be much less. The table above would show that expenditure on warranty was higher in almost all succeeding years except financial year 2009-09. We cannot say that assessee had followed a method which was not scientific. We are of the opinion that the three conditions set out in the case of Rotork Controls India (Pvt) Ltd 2009 (5) TMI 16 - SUPREME COURT have been satisfied by the assessee viz. establishing that there is a present obligation on account of a past event working out the probable estimate of the outflow of the resources required and substantiating the reliability of such estimate. Especially so since the assessee was mandatorily required to follow AS-I and principles of prudence stipulated in such AS-I required provisioning for all known liabilities even if it could not be determined with certainty but was made based on available data. We therefore delete the addition made by the AO disallowing the provision for warranty. - Decided in favour of assessee.
Issues Involved: Transfer Pricing Adjustment, Disallowance of Warranty Provision
Issue 1: Transfer Pricing Adjustment Detailed Analysis: The assessee raised grievances on a Transfer Pricing (TP) adjustment recommended by the Transfer Pricing Officer (TPO). This was the second round of proceedings before the Tribunal. The Tribunal had previously directed the TPO to verify whether similar transactions with Associated Enterprises (AEs) for the assessment years (A.Ys.) 2007-08 and 2008-09 were accepted by the TPO. If so, the pricing of the international transactions for the impugned year should be accepted as at arm's length. The TPO, in a consequential order dated 30.01.2014, mentioned that the TP analysis for A.Ys. 2007-08 and 2008-09 was not accepted, as the assessee had applied the Comparable Uncontrolled Price (CUP) method, whereas the TPO had used the Transactional Net Margin Method (TNMM). Despite the Dispute Resolution Panel (DRP) accepting the assessee's stand, the TPO persisted with his earlier recommendation, leading to the assessment being completed without considering the DRP's order. The Tribunal found that the TPO did not properly appreciate the facts and failed to maintain continuity and uniformity in the approach towards the assessee's transactions. The Tribunal directed the Assessing Officer (AO) to adopt the TP analysis conducted by the assessee for the relevant assessment year if similar transactions were accepted for A.Ys. 2007-08 and 2008-09. The Tribunal noted that the AO was bound by the DRP's directions and deleted the additions made by the AO, treating grounds 2 to 6 as partly allowed. Issue 2: Disallowance of Warranty Provision Detailed Analysis: The assessee contested the disallowance of a warranty provision amounting to ?42,19,22,899/-. The Tribunal had earlier remanded the issue to the AO to verify if the provision was made on a scientific basis, as per the guidelines issued by the Supreme Court in the case of Rotork Controls India Pvt. Ltd. The AO reconsidered the question of warranty provisioning and found that the percentage of utilization for the warranty provision was significantly lower than the provision created. The AO concluded that the assessee could not show any scientific methodology for estimating the provision and allowed only the actual warranty expenditure, disallowing the balance claim. The DRP upheld the AO's analysis, stating that the assessee did not produce sufficient evidence or technical studies to justify the warranty provisioning. Before the Tribunal, the assessee argued that it relied on the historical data and methodology followed by IBM, from whom it had acquired the business. The Tribunal found merit in the assessee's argument that the provision for a year should be compared with the actual spending in the succeeding year. The Tribunal noted that the assessee had followed a scientific method for provisioning based on machine months, repair action rate, and cost per claim. The Tribunal concluded that the three conditions set out by the Supreme Court in Rotork Controls India Pvt. Ltd. were satisfied and deleted the addition made by the AO, allowing ground 7 of the assessee. Conclusion In conclusion, the Tribunal allowed the appeal of the assessee, deleting the TP adjustments and disallowance of the warranty provision. The Tribunal emphasized the importance of maintaining consistency in TP analysis and the necessity of following a scientific method for warranty provisioning. The appeal was allowed, and the order was pronounced on 30th May 2016.
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