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TMI Blog2013 (8) TMI 826X X X X Extracts X X X X X X X X Extracts X X X X ..... red in confirming the action of the TPO/AO in determining arm's length price in respect of payment of royalty at Rs. Nil as against Rs. 1,50,68,228/- determined by the appellant under Transaction Net Margin Method (TNMM). While doing so, the learned CIT(A), inter alia, erred in - i) Not considering adjustment for functional analysis of comparable companies furnished during the course of assessment/appeal proceedings. ii) Not dealing with/accepting the appellant's submissions that M/s. SM Energy Tekniks & Electronics Ltd. (SM Energy) can not be rejected as comparable only on the ground that the said comparable company is consistently incurring losses. iii) Rejecting Schlafhorst Engineering India Ltd. (Schlafhorst) as comparable company, without giving opportunity to the appellant, merely on the grounds that the accounting years of Schlafhorst and the appellant are different and that Schlafhorst had abnormal loss during the year. iv) Not directing the AO to carry out fresh search finding out appropriate comparables while holding that comparables adopted by the appellant are not appropriate. v) Not dealing with appellant's submissions on claim of deduction of 5% in arm's f s leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder having been passed in accordance with the provisions of section 92CA(4) of the Act and the Learned CIT(A) having no power or jurisdiction to revise/review the order of the TPO, the enhancement to income of Rs. 1,05,94,098/- directed by the Learned CIT(A) ought to be set aside. 2. Without prejudice to Ground 3 in appeal, in the even it is held that Transaction Net Margin Method is the most appropriate method to determine the arm's length price in respect of purchase of components then the adjustments on account or arm's length price, if any, ought to be made by applying the profit Level Indicator to only the international transactions entered into by the appellant with the associated enterprises as against the Profit Level Indicator applied by the Commissioner of Income Tax (Appeals) to the total transactions entered into by the appellant." 4. Thus, the assessee has raised the original ground as well as additional ground vide letter dated 25.3.2013 only with respect to the addition on account of transfer pricing adjustment. 5. At the time of hearing the assessee has also raised an additional ground as under: "The Learned Dy. Commissioner of Income Tax (DCIT) has erred in ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is not at arm's length. The TPO has applied TNMM as most appropriate method for bench marking, the international transaction and worked out an adjustment at Rs. 1.80 crores but since the payment of royalty being only at Rs. 1.50 crores, the ALP of such payment of royalty has been determined by the TPO at Nil and accordingly made an adjustment of Rs. 1.50 crores. On appeal, the Commissioner of Income Tax(Appeals) enhance the assessment by making the adjustment in respect of the International transaction of purchase of components. The Commissioner of Income Tax(Appeals) has bench marked all the International transaction of the assessee by using TNMM as most appropriate method and operating profit to sale as PLI and considering only two comparables. The Commissioner of Income Tax(Appeals) has determined the arithmetic mean at 8.33% as against the assessee's operating profit/sale at 4.71%. Accordingly, the Commissioner of Income Tax(Appeals) has enhanced an adjustment to Rs. 2,56,62,326/- as against the adjustment made by the TPO at Rs. 1,50,68,228/-. Consequently, a differential amount of Rs. 1,05,94,098/- was directed to be enhanced. 8. We have heard the Ld. AR as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the difference amount into Rs. 256,62,326/-. The operating cost of the assessee is within the 5% tolerance range of the ALP determined by the Commissioner of Income Tax(Appeals), therefore, no adjustment is called for on this account. It is pertinent to note that the Commissioner of Income Tax(Appeals) has determined the arm's length by considering the entity level results of the assessee which includes all the international transactions, therefore, when the over all price of the assessee is within the range of 5% of ALP being the arithmetic mean then no adjustment is permitted. 10. In view of the findings on the ground no. 2(v) above the other grounds of the assessee's appeal including the additional grounds of the assessee's appeal regarding to TP adjustment become in fructuous being academic in nature. Hence, we do not propose to go into the other grounds raised by the assessee though the same are kept open except the additional ground raised by the assessee at the time of hearing regarding the adjustment of Rs. 162,91,484/- being diminution in value of investment while computing book profit u/s 115JB of the Act. 11. Now we take up the additional ground raised by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same. But in view of the various decisions on the point and particularly in the case of CIT Vs Yokogawa India Ltd. (supra), this issue requires a fresh consideration. Accordingly in the interest of justice, we admit the additional ground and remit, the same to the record of the Assessing Officer for examining and deciding the same in the light of the judicial precedent on this point. 15. The revenue has raised the following ground in this appeal: "On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax(Appeals) erred in deleting the addition of Rs. 47,52,496/- on account of 'Provision of warrant." "On the facts and in the circumstances of the case and in law, the Ld, Commissioner of Income Tax(Appeals) erred in not appreciating that the provision is not crystalised and hence is in the nature of contingent liability and consequently not allowable." On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax(Appeals) erred in directing the Assessing Officer to exclude 'Provision of Warranty of Rs. 47,57,496/- for computing Book Profit u/s 115JB." 16. The only issue arises in the revenue appeal is rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the period from August 2006 to March 2007. Sales made prior to the said period, the warranty period expired on or before 31st March 2007 and therefore, no provision is required as the actual expenses incurred are charged to profit and loss account. The Ld. AR has pointed out as per the past record of the expenses incurred on the warranty, it comes to an average of 1% to the turnover. Therefore, the provision for the year is equivalent to 1% of the sale effected during the period from August 2006 to March 2007 is based on the data of past expenses on warranty. He has relied upon the decision of Hon'ble Supreme Court in case of Rotork Controls India Pvt. Ltd. Vs CIT (supra). As regards the adjustment for computing the book profit u/s 115JB, the Ld. AR of the assessee has submitted that when the provision is made based on the past experience and matching concept, no adjustment can be made u/s 115JB of the Act. He has relied upon the following decision of page No. 26-27: CIT Vs National Hydro Electric Power Corporation Ltd. 45 DTR 117 (P&H) Delhi High Court Court in CIT Vs Whirlpool of India Ltd. (ITA No. 1154 of 2009) Delhi High Court in Commissioner of Income Tax Vs Woodward Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee conditions recognising the liability are satisfied, the claim could not be automatically allowed as a provision made on a historical trend." After observing so, the hon'ble Division Bench further held at paragraph 18 that the provision for service charges payable by the assessee by way of warranty provision was not made on any scientific data. By applying the facts of the case to the law declared by the apex court, it was further observed therein that the provision made was only on ad hoc basis which was a fact recorded by the Tribunal. Here also, the Commissioner as well as the Tribunal categorically found that the assessee had not proved the provision of warranty expenses based on any scientific method in such circumstances, the assessee cannot place reliance on the decision of the hon'ble Supreme Court reported in Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) as the facts are totally distinguishable. Even otherwise the assessee has to pass through the triple test as declared therein in order to succeed in his claim on provision for warranty. In the absence of any such finding in its favour satisfying the said triple test, the assessee can not rely on the said d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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