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2022 (3) TMI 1455 - AT - Income TaxTP Adjustment - MAM - rejection of internal CUP selected by assessee as most appropriate method by the revenue authorities - HELD THAT - As the submissions advanced are on identical facts that has already been considered by this Tribunal, for preceding assessment years as well as assessment year 2015-16 2020 (3) TMI 471 - ITAT BANGALORE respectfully following the above view, we direct the Ld.TPO to replace the TNMM with CUP as most appropriate method Treatment of AMP expenses pertaining to trading segment as an international transaction and determining the ALP in respect of the same - HELD THAT - We uphod CPM to be the MAM in computing the ALP of the trading segment. Further, based on the categorical observation by the Ld.TPO regarding the trading segment to be at arm s length, we direct the Ld.AO/TPO to delete the adjustment proposed, in respect of the AMP expenses as it cannot be treated as international transactions in the present facts of the case. Disallowance of provision of warranty - allowable revenue expenses u/s 37 - HELD THAT - As noted that coordinate bench of this Tribunal in assessee s own case for assessment years 2006-07 2016 (5) TMI 1524 - ITAT BANGALORE , AY 2007-08, AY 201011 2017 (3) TMI 1835 - ITAT BANGALORE upheld that provision for warranty has been created on a scientific basis and hence allowable as expenditure under section 37 under the Act. Thus in assessee s own case for preceding and subsequent assessment years relying of the decision of the Hon ble Supreme Court in the case of Rotork Controls India Pvt.Ltd 2009 (5) TMI 16 - SUPREME COURT we hold that provision for warranty expenditure is allowable. Disallowance of provision for leave encashment - AO rejected the submission of assessee and held that provision for leave encashment is being unascertained liability was liable to be disallowed under section 43B - HELD THAT - We note that coordinate bench of this Tribunal in assessee s own case for AY 2011-12 has held that leave encashment is not a contingent liability, and that, the same ought not to be disallowed while computing income under normal provisions of the Act. MAT computation u/s 115JB - warranty and provision for leave encashment as an 'unascertained liability' and added the same to book profits under section 115JB - HELD THAT - As following the ration laid down by Hon ble Supreme Court in case of Rotork Control 2009 (5) TMI 16 - SUPREME COURT . we have held that the provision for warranty cannot be treated as unascertained liability. In respect of provision of leave encashment, this Tribunal in assessee s own case for AY 2011-12 has observed that provision for leave encashment need not to be added back to book profits for the purpose of determining tax liability u/s 115JB of the Act Thus no merit in the manner in which the book profits for purposes of section 115JB has been computed.Accordingly we direct the Ld.AO to exclude the two items from the book profits for purpose of computing tax liability under section 115JB of the Act. Assessee appeal allowed.
Issues Involved:
1. Transfer pricing adjustment in the Manufacturing segment. 2. Transfer pricing adjustment related to Advertising, Marketing, and Promotion (AMP) expenditure. 3. Disallowance of provision for warranty. 4. Disallowance of provision for leave encashment. 5. Additions to book profits under section 115JB of the Income Tax Act. 6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Detailed Analysis: 1. Transfer Pricing Adjustment in the Manufacturing Segment: Rejection of Internal CUP Method: The assessee used the Comparable Uncontrolled Price (CUP) method to benchmark the import prices of raw materials from associated enterprises (AEs). The Transfer Pricing Officer (TPO) rejected this method, citing reasons such as non-availability of reliable data, high obsolescence in the computer hardware industry, and reliance on industry averages. The TPO instead applied the Transactional Net Margin Method (TNMM), resulting in an adjustment of INR 10,19,77,372. Tribunal's Decision: The Tribunal directed the TPO to adopt CUP as the Most Appropriate Method (MAM) for determining the Arm's Length Price (ALP), following consistent decisions in previous years. The Tribunal found that the assessee had provided sufficient data to support the use of the CUP method. 2. Transfer Pricing Adjustment Related to AMP Expenditure: Characterization of AMP Expenditure: The TPO characterized the AMP expenditure as an international transaction, alleging that the expenditure promoted the brand of the foreign AE. The TPO used the Bright Line Test to benchmark AMP expenses, resulting in an adjustment of INR 82,05,25,509. Tribunal's Decision: The Tribunal followed the decision of the Delhi High Court in Sony Ericsson Mobile Communications P. Ltd., which held that AMP expenses should not be treated as a separate international transaction if the overall net profit margin is at arm's length. The Tribunal found that the TPO had already determined that the net profit margin in the trading segment was at arm's length. Consequently, the Tribunal directed the deletion of the AMP adjustment. 3. Disallowance of Provision for Warranty: Scientific Basis of Warranty Provision: The assessee created a provision for warranty based on a scientific methodology. The Assessing Officer (AO) disallowed the provision, treating it as a contingent liability. Tribunal's Decision: The Tribunal upheld the assessee's claim, relying on the Supreme Court's decision in Rotork Controls India Pvt. Ltd. and consistent decisions in the assessee's own case in previous years. The Tribunal found that the provision was created on a scientific basis and allowed it as a deductible expenditure under section 37 of the Income Tax Act. 4. Disallowance of Provision for Leave Encashment: Provision for Leave Encashment: The AO disallowed the provision for leave encashment, treating it as an unascertained liability. The assessee argued that a significant portion of the provision had been paid before the due date for filing the return. Tribunal's Decision: The Tribunal remanded the issue back to the AO for verification, directing the AO to consider the reconciliation provided by the assessee and the decision in the assessee's own case for AY 2011-12, which allowed the provision for leave encashment as a deductible expense. 5. Additions to Book Profits under Section 115JB: Treatment of Provisions as Unascertained Liabilities: The AO added the provisions for warranty and leave encashment to the book profits under section 115JB, treating them as unascertained liabilities. Tribunal's Decision: The Tribunal directed the exclusion of these provisions from the book profits, following the Supreme Court's decision in Rotork Controls and the Tribunal's decision in the assessee's own case for AY 2011-12. 6. Initiation of Penalty Proceedings under Section 271(1)(c): Penalty Proceedings: The AO initiated penalty proceedings under section 271(1)(c) without concluding that the assessee had concealed any particulars of income or furnished inaccurate particulars. Tribunal's Decision: The Tribunal did not explicitly address this issue in the detailed analysis provided. Conclusion: The Tribunal allowed the appeal filed by the assessee, directing the TPO to adopt the CUP method for the manufacturing segment, deleting the AMP adjustment, and allowing the provisions for warranty and leave encashment as deductible expenses. The Tribunal also directed the exclusion of these provisions from the book profits under section 115JB.
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