2019 (4) TMI 1929 - AT - Income Tax

TP Adjustment - characterization of services rendered by the assessee to its AEs. - comparable selection - function/ services performed by assessee - HELD THAT - We find that the assessee had characterized the services rendered by it as Design and Engineering Services which fact has been recorded in the TPO s order. The TPO, however, characterized the services rendered as ITES and benchmarked the same in his TP study /analysis carried out by him. The Co-ordinate Bench of this Tribunal, in the assessee s own case for Assessment Year 2009-10 had remanded the issue of characterization of services rendered by the assessee back to the file of the TPO for fresh examination. Thus we deem it appropriate to remand the issue of characterization of services rendered by the assessee, to the file of the AO for de-novo examination and decision on the characterization of the services rendered by the assessee for this Assessment Year also. Provision for Warranty - AO has disallowed the provisions for warranty by holding that the assessee had failed to furnish the scientific basis on which the provision for warranty has been created - DRP upheld the disallowance made by the AO - HELD THAT - We deem it appropriate to respectfully follow the aforesaid decision of the Co-ordinate Bench of this Tribunal in the assessee s own case for Assessment Year 2009- 10 and remand the issue of provision for warranty to the file of the AO for de-novo examination and adjudication with the same directions that the assessee should bring on record all the details evidences to establish that the provisions made by the assessee is on scientific basis and the AO should pass a speaking and reasoned order after providing the assessee adequate opportunity of being heard and to file details / submissions which shall be duly considered by the AO. We hold and direct accordingly. Annual Licence Fees / R D Expenses - AO observed that the assessee had not furnished any evidence of the nature of expenses and therefore held them to be capital in nature and disallowed the assessee s claim - in its objections before the DRP, the assessee claimed that these expenses are towards annual licence fee for the R D work carried out by the group company, which was used by the assessee and claim, though not put forth before the AO has been made before the DRP - HELD THAT - In view of the above order of the Co-ordinate Bench of this Tribunal in the assessee s own case for Assessment year 2009-10 and considering that the claim of the assessee regarding the expenses being for annual licence fees has not been examined at all and that the details / evidences submitted by the assessee before the DRP has not been admitted for consideration, we deem it appropriate to follow the order of the Co-ordinate Bench of this Tribunal in the assessee s own case for Assessment Year 2009-10 - admit the details filed by assessee before DRP and remand this issue back to the file of the AO with the same directions as contained in the Tribunal order for Assessment Year 2009-10 - The assessee is directed to provide complete details and evidence of its claim which may be required by the AO to examine and decide the matter

Summary

Issues Involved:
1. Characterization of services rendered by the assessee.
2. Transfer Pricing adjustments.
3. Disallowance of provision for warranty.
4. Disallowance of annual license fees/R&D expenses.

Detailed Analysis:

1. Characterization of Services Rendered by the Assessee:
The primary issue was the characterization of services rendered by the assessee to its Associated Enterprises (AEs). The assessee classified its services as "Design and Engineering Services," while the Transfer Pricing Officer (TPO) characterized them as Information Technology Enabled Services (ITES). The Tribunal found that the TPO had incorrectly characterized the services and remanded the issue back to the Assessing Officer (AO) for a fresh examination. This decision was based on the Tribunal's earlier ruling in the assessee’s own case for Assessment Year 2009-10, which had also remanded the issue back to the TPO for fresh consideration.

2. Transfer Pricing Adjustments:
The TPO rejected the assessee's Transfer Pricing (TP) study and conducted his own analysis, leading to a proposed adjustment of ?11,19,95,059/-. The AO, following the TPO’s order, determined the assessee’s loss at ?37,68,41,545/-. The Dispute Resolution Panel (DRP) later reduced the TP adjustment to ?8,43,63,985/-. The Tribunal, however, deemed all other issues related to the TP adjustment as academic in nature since the primary issue of characterization of services was remanded back to the AO for fresh adjudication.

3. Disallowance of Provision for Warranty:
The AO disallowed the provision for warranty amounting to ?3,61,87,333/- on the grounds that the assessee failed to furnish a scientific basis for the provision. The DRP upheld this disallowance. The Tribunal noted that a similar issue for Assessment Year 2009-10 had been remanded back to the AO for fresh determination. The Tribunal followed this precedent and remanded the issue back to the AO for de-novo examination, directing the assessee to provide all necessary details to establish that the provisions were made on a scientific basis.

4. Disallowance of Annual License Fees/R&D Expenses:
The AO disallowed the expenses claimed as R&D expenses amounting to ?22,39,43,000/- by treating them as capital in nature. The DRP upheld this disallowance, noting that the assessee had not furnished evidence of the nature of expenses. The Tribunal found that the assessee had claimed these expenses as annual license fees for R&D work carried out by the group company, which was not examined by the AO. Following the Tribunal’s decision in the assessee’s own case for Assessment Year 2009-10, the Tribunal remanded this issue back to the AO for fresh examination and adjudication, directing the assessee to provide complete details and evidence of its claim.

Conclusion:
The Tribunal allowed both the assessee’s appeal and the Revenue’s cross-appeal for statistical purposes, remanding the issues back to the AO for fresh examination and adjudication. The Tribunal emphasized the need for the AO to provide adequate opportunity for the assessee to present its case and to duly consider the submissions and evidence provided.