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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 ..... arables identified by the TPO. In such circumstances no adjustment could be made by way of ALP. Therefore, accept the alternative plea of the assessee and delete the addition made by the AO - in favour of assessee. Disallowing the provision for warranty expenses - Held that:- The assessee has given a detailed basis on which provision for warranty has been arrived at. As seen from the methodology that the assessee takes into account the warranty liability for the accounting period after bifurcating the likely cost on account of labour, material etc. & the summary of the provision also shows that wherever excess provision was made in an earlier year, the same is reversed in the subsequent period. The claim made by the assessee prima facie shows that the estimate is made by the assessee on scientific basis and reasonable basis. Since neither the AO nor the DRP have given any contrary findings with regard to the methodology adopted by the assessee in making provision the claim made by the assessee should be accepted. Assessee satisfies the criteria for claiming deduction on account of provision for warranty as laid down by in the case of Rotork Controls (P.) Ltd. (2009 (5) TMI 16 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit Margin Paper Book ref Appellant's Profit margin for FY 2005-06 after making adjustments to unabsorbed/higher levels of employee costs and advertisement costs considering loss of channel partner 'A' combined trading and Indent sales activity 8.01% 107, 112 Arm's length margin of 5 comparables selected after characterizing appellant as a trader/distributor 0.94% 107, 111 TPO's assessment -Snapshot TOP bifurcated Trading and Indent Sales activity and determined separate ALP Profit Margin Paper Book ref Trading activity Appellant's margin on Trading segment as determined by TPO after segmentation of financial results by him, without allowing any adjustments for extraordinary costs etc -13.30% Page 6 Arm's length margin of 31 companies selected as comparable for the appellant's trading/distribution activity 3.34% Page 6 Para 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct. 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 ₹ 4,90,07,000 by showing desired profits margin of comparable companies at 0.36% on sales as the operating margin of the assessee shown is (-) 19.84%. Accordingly TPO computed the ALP in the purchase of finished goods at ₹ 2,70,81,000 as against actual value of ₹ 7,60,88,729 shown by the assessee. We observe that TPO stated that the assessee has adopted RPM for determining the ALP for the import of finished goods. He has stated that the assessee has determined gross profit margin by taking difference between costs of purchase of value of sales. The assessee has stated that the gross profit margin in the distribution activity was 40.80% vis-a-vis comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 17 of the DRP's order). The learned Departmental Representative, on the other hand, relied on the order of the DRP and submitted that the assessee has not raised the issue specifically before the TPO. We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipments from its AE and re-sells them without any value addition to the Indian customers. In similar circumstances, Mumbai Bench of the Tribunal in the case of L'Oreal India Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in Assessee's warranty policy as Labour cost adjustment factor or Material cost adjustment factor). - Probability of claims arising specific to the warranty period attached to each product (referred to in assessee's warranty policy as Accrual factor) - Expected growth in warranty expenses as a result of the growth In the sales of products covered by warranty cover (referred to in assessee's warranty policy as Sales factor) - Each of the factors including assumptions on probability of claims etc are supported by sound rationale as detailed in the warranty polic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 which the assessee made provision for liability on account of warranty was scientific or not. The DRP merely relied on the report of the AO without examining as to whether the method of providing for warranty liability was on a scientific basis. We have perused the methodology of making provision for warranty reserve. It is seen from the methodology that the assessee takes into account the warranty liability for the accounting period after bifurcating the likely cost on account of labour, material etc. The summary of the provision also shows that wherever excess provision was made in an earlier year, the same is reversed in the subsequent period. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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