2022 (2) TMI 1331 - AT - Income Tax

TP Adjustment - assessee bench marked its international transactions on the TNM method - A.R. submitted that the TPO has considered the services rendered by the assessee as Information Technology Enabled Services (ITES) and accordingly selected comparables which are providing BPO/KPO services - HELD THAT - TPO had recharacterized the activities of the assessee in AY 2008-09 and 2009-10 also and since the same was disputed by the assessee before the Tribunal, the ITAT has restored the issue of transfer pricing adjustment to the file of the TPO by the coordinate bench - Thus we restore this issue to the file of the AO/TPO with similar directions. Disallowance of provision for warranty - A.R. submitted that the assessee has been providing for warranty liability on accrual basis on the basis of percentage of sales at the end of each year - contention of the assessee is that it is following a scientific method for determining the amount to be provided for warranty liability - HELD THAT - We notice that the AO has rejected the claim without finding fault with the method adopted by the assessee to determine the quantum of provision. This is not justified. When the assessee is following a scientific method consistently which also approximately corresponds with the actual expenditure incurred subsequently, then there is no reason to disallow the provision for warranty as held by Hon ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT Accordingly, in AY 2011-12, the Tribunal has restored this issue to the file of the AO for examining it afresh. Accordingly, following the decision rendered by the coordinate bench in the assessee s own case for assessment year 2011-12, we restore this issue to the file of the AO for examining it afresh. Disallowance of software expense - disallowance u/s 40(a)(i) - AR prayed that both the issues, viz., software expenses disallowed as capital in nature and disallowed u/s 40(a)(i) of the Act require re-examination by considering the above said decisions - HELD THAT - We find merit in the submissions of Ld. A.R. Accordingly, we restore both the issues relating to software expenses to the file of the A.O. for examining them afresh in the light of above said decisions and also any other decision, information or explanations that may be furnished by the assessee before him.

Summary

Issues:
1. Transfer pricing adjustment
2. Disallowance of provision for warranty
3. Disallowance of software expenses

Transfer Pricing Adjustment:
The appellant contested the addition made on account of transfer pricing adjustment. The appellant, engaged in providing Information Technology and Engineering Services, argued that the Transfer Pricing Officer (TPO) recharacterized its services as "Information Technology Enabled Services" (ITES) instead of engineering design services. The Tribunal noted discrepancies in the characterization of services and directed the issue to be reconsidered by the TPO for a denovo assessment. The issue was restored to the file of the TPO for further examination based on the directions given by the coordinate bench in a previous case.

Disallowance of Provision for Warranty:
The appellant provided for warranty liability based on a percentage of sales at the end of each year. The Assessing Officer (AO) disallowed the provision amount, which was challenged by the appellant citing a scientific basis for determining the provision. The Tribunal held that when a scientific method is consistently followed by the assessee and aligns with actual expenditure, there is no justification for disallowing the provision. The issue was restored to the AO for fresh examination following a similar decision in a previous year.

Disallowance of Software Expenses:
The AO disallowed a portion of software expenses, treating it as capital expenditure and disallowing the amount not subject to tax deduction at source. The appellant argued that recent decisions necessitate a re-examination of the issues related to software expenses. The Tribunal agreed, restoring both issues concerning software expenses to the AO for reevaluation in light of relevant legal decisions and any additional information provided by the appellant.

In conclusion, both the appeals of the assessee and the revenue were treated as allowed for statistical purposes, with all issues being restored to the file of the appropriate authorities for further examination.