2016 (3) TMI 1483 - AT - Income Tax

DRP assuming jurisdiction u/s. 154 - TP Adjustment - TPO found from the audited financials of the assessee company that it incurred huge expenses in the nature of Advertisement and Market Promotion (AMP) - HELD THAT - It is an undisputed fact that the assessee company filed full details which are considered as AMP expenditure by the TPO. These include sales discount selling expenditure warranty expenditure. These details were not considered by the DRP at the time of passing the original directions u/s. 144C of the Act. When this fact was brought to the notice of DRP the DRP modified its directions to exclude those items from the AMP expenditure following the law laid down in the case of M/s. L.G. Electronics India Private Limited 2013 (6) TMI 217 - ITAT DELHI - Therefore it is a case of non-consideration of material on record which would constitute a mistake apparent from record as laid down in CIT vs. Mithalal Ashok Kumar 1984 (11) TMI 43 - MADHYA PRADESH HIGH COURT - Therefore the DRP was justified in assuming jurisdiction u/s. 154 of the Act. Hence the grounds of appeal filed by the Revenue are rejected and the appeal is dismissed. Provision for warranty - as per DR only in the nature of contingent liability and therefore cannot be allowed as deduction and provision was not based on any reliable estimate - HELD THAT - The provision was made at a percentage of sales and percentage of sales varies from year to year depending upon the past trend. Assuming that the claims for warranty are made in the next year the actual claims are almost near to the provision created in the immediately preceding year. E.g. in the FY 2009-10 actual claims made were Rs. 51, 38, 524 as against provision created of Rs. 66, 24, 970. Similarly in FY 2011-12 actual claims of Rs. 1, 21, 09, 422 was made as against provision of Rs. 1, 29, 27, 237 and so on. This only goes to show that the provision made is not far in excess of the actual claims made in the succeeding year. Therefore it can be safely presumed that the provision for warranty was crated on a reliable estimate basis and based on historical trend and the ratio of Rotork Controls Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT is squarely applicable to the facts of the present case. Therefore we are of the opinion that the DRP was right in directing the AO to delete the addition on account of provision for warranty expenditure. Hence the grounds of appeal filed by the Revenue are rejected.

Summary

Issues:
1. Transfer Pricing Adjustment on Advertisement and Market Promotion (AMP) Expenditure
2. Jurisdiction of Dispute Resolution Panel (DRP) under Section 154 for rectification of directions

Transfer Pricing Adjustment on Advertisement and Market Promotion (AMP) Expenditure:
The case involved international transactions by an assessee company for the purchase of traded goods, leading to a Transfer Pricing Officer (TPO) analysis of arm's length price (ALP). The TPO noted significant Advertisement and Market Promotion (AMP) expenses incurred by the company and recommended adjustments due to the variance in AMP expenditure compared to comparable companies. The Dispute Resolution Panel (DRP) upheld the TPO's adjustments initially, but upon the assessee's submission of detailed AMP expenditure nature, the DRP rectified its direction under Section 154, excluding certain expenses from AMP. The Revenue challenged this decision on grounds of law and jurisdiction.

Jurisdiction of Dispute Resolution Panel (DRP) under Section 154 for rectification of directions:
The primary issue was whether the DRP was justified in assuming jurisdiction under Section 154 to rectify its directions regarding AMP expenditure. The DRP's modification was based on the assessee's submission of full details related to AMP expenditure, which were not considered initially. The Tribunal held that the DRP's rectification was valid as it corrected a non-consideration of material on record, constituting a mistake apparent from the record. Citing legal precedent, the Tribunal rejected the Revenue's appeal, affirming the DRP's jurisdiction under Section 154.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the DRP's rectification of directions regarding AMP expenditure and provision for warranty. The decision emphasized the importance of considering all relevant material on record and validated the DRP's exercise of jurisdiction under Section 154 to rectify errors. The judgment provided clarity on the permissible scope of rectification by the DRP in transfer pricing matters, ensuring adherence to legal principles and factual accuracy in tax assessments.