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TMI Blog2013 (2) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... pment, logic analysers and other test and measurement equipments and accessories on behalf of its Associate Enterprise (AE). Besides the above, if a customer in India wants to purchase the equipment directly from the AE, the assessee acts as intermediary and derives commission income for services rendered. These are the two streams of revenue which the assessee derives from carrying out transactions with its AE. It is not in dispute that the transaction between the assessee and its AE was an international transaction and the income arising from such transaction has to be computed in accordance with the provisions of sec.92 of the Act that having regard to the Arms' Length Price (ALP). The assessee conducted a transfer pricing study in respect of its trading activity as well as commission agency activity (which is referred to as indent sales activity in the TPO's order). The most appropriate method selected by the assessee was TNMM. The stand of the assessee in the transfer pricing study, the TPO's adjustment in respect of the claim of the assessee and the DRP's directions may be summarized in the form of following chart: Appellant's Transfer Pricing documentati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted that by the learned counsel for the assessee that the most appropriate method that could be applied for determining the ALP would be the resale price method (RPM). In this regard, the learned. counsel for the assessee drew our attention to the decision of the ITAT, Mumbai 'L' Bench, in ITA No.5423/Mum/2009 dated 25-4-2012 in the case of ITO v. L'Oreal India Pvt. Ltd. [2012] 53 SOT 263 (Mum.) (URO) wherein the Tribunal had to deal with the case of an assessee who was having two segments namely manufacturing and distribution of a consumable product. The question before the Tribunal was as to the most appropriate method for determining the ALP in respect of business activity relating to the distribution segment. The Tribunal, in para. 18 and 19 of its judgment had held as follows: "18. The only question for our consideration is as to whether to determine ALP in respect of business activity relating to distribution segment of the assessee with the AE is to be considered by RPM or TNMM. We observe that TPO has applied TNMM and has suggested adjustment of Rs. 4,90,07,000 by showing desired profits margin of comparable companies at 0.36% on sales as the operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to unrelated parties, RPM is the most appropriate method....." Pointing out to the above decision, learned counsel for the assessee submitted that RPM should be the most appropriate method to be followed in the case of the assessee. Thereafter the learned counsel for the assessee drew our attention to the gross profit margin of the assessee which was 35.61% which was much higher than the arithmetic mean of the GP margin of the comparables selected by the TPO himself which was only 12.90%. It was submitted by him that the RPM which is the GP margin method, if taken as most appropriate method, then the assessee's GP margin was much better than the comparables identified by the TPO himself and therefore no adjustment by way of addition to ALP is required to be made. In this regard it was submitted that the issue was not raised by the assessee before the TPO but the same was raised before the DRP. The DRP has given no specific reason for rejecting the claim of the assessee but has merely observed that no comments in view of the fact that the transfer pricing study of the TPO has been re-examined and the objections raised does not have any direct relevance to it. (point 39, page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting it as an unascertained liability. 6.1 In this regard, the following facts were highlighted by the assessee before the DRP. * The products sold by the assessee were sophisticated products involving complex technology. During the FY 2005-06, the assessee had sold 26 different types of products. * Three types of warranty were provided by the assessee. While a 1 year warranty is provided for most products, a 3 year warranty is provided in respect of 5 products while a 90 day warranty is provided in respect of provision of customer/maintenance service. * The warranty reserve is computed on a scientific basis as detailed in the appellant's detailed warranty policy. The policy considers various relevant factors including the following: - Warranty period granted for a particular product - Warranty expenses (Labour and material costs) incurred in the preceding 12 months for each product - Expected changes in the prices/inflation pertaining to labour or material costs which could impact the level of warranty expenses to be incurred in the future (referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court has held that the reliable estimate of a liability arising from an obligating event of the past would be a justified basis of claiming expenditure. Further reference was made to the decision of the Hon'ble Delhi High Court in the case of CIT v. Ericssion Communications (P.) Ltd. [2009] 318 ITR 340 wherein the Hon'ble High Court has held that the liability on account of warranty computed on a scientific basis and by way of consistent policy adopted by the assessee should be accepted. It was also pointed out that similar claims were made by the assessee in the past but no disallowance was made by the revenue authorities. 6.3 The learned Departmental Representative, however, relied on the order of the DRP wherein the DRP has held that the assessee's provision for warranty was not made on scientific basis. 7. We have considered the rival submissions. In the submissions before the DRP, the assessee has given a detailed basis on which provision for warranty has been arrived at. The same is given as annexure 'B' to this order. The DRP called for a remand report from the AO on this aspect. The AO has not given any finding as to whether the basis on whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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