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TMI Blog2017 (4) TMI 1146X X X X Extracts X X X X X X X X Extracts X X X X ..... ion as discussed above, we find that assessee was entitled to make claim on account of provision for warranty expenses in the year before us. However, the amount quantified for the provision is also under dispute and rightly so. It is brought before us that computation made by the assessee for estimating the provision was incorrect. Ld. Counsel has also fairly agreed to this position. We have verified the facts and figures. It is informed that the basis for making provision in this year was on the basis of actual claim booked in FY 2007-08 as compared to the turnover of FY 2006-07. It is informed that the amount of actual claim booked in financial year 2007-08 was ₹ 5,03,93,000 and the amount of turnover for the FY 2006-07 was to the tune of 825,30,47,487 (i.e. ₹ 825.31 crores). Thus, the ratio of the two comes to around 0.61%. Now if we apply the ratio of 0.61% to the turnover of FY 2007-08 which is ₹ 900.52 crores, then we get an amount of ₹ 5,49,85,586 as per the chart provided by the assessee. The said figure has been accepted as correct by Ld. CIT-DR also. Thus, we find it proper that amount of provision should be allowed for the said figure of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 143(3) r.w.s. 144C(13) of the Act in pursuance to directions u/s 144C(5) of the Act issued by Dispute Resolution Panel-I, Mumbai, vide order dated 28-09-2012, on the following grounds:- Based on the facts and circumstances of the case and in law, Anchor Electricals Private Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against e order passed by the learned Assistant Commissioner of Income Tax, Central Circle 41 Mumbai (hereinafter referred to as 'learned AO' or 'AO') under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - I, Mumbai (hereinafter referred to as the 'DRP') on the following grounds, each of which are without prejudice to one another: A. Transfer pricing adjustments 1. Non consideration of comparability analysis as documented in the transfer pricing study report On the facts and in the circumstances of the case and in law, the learned DRP! AO/ Deputy Commissioner of Income-tax - Transfer Pricing - 1(6) ('TPO') erred in not cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e software On the facts and in the circumstances of the case and in law, the learned DRP! AO/ TPO erred in law and in facts by making an adjustment to the total income of the Appellant on account of service fees/ handling charges paid by the Appellant to its AE in respect of Oracle software. 9. Commercial expediency challenged On the facts and in the circumstances of the case and in law, the learned DRP / AO / TPO erred in challenging the commercial expediency of the Appellant in relation to payment of royalty and service fees/ handling charges by the Appellant to its AEs. B. Corporate tax adjustments I. Adjustments to book profit while computing income under section II5JB of the Act 10. Disallowing provisions for doubtful debts On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition in respect of provision for doubtful debts of ₹ 201 000,000 while computing book profit under section 11 5JB of the Act, as per the directions of the DRP. 11. Disallowing provisions for slow moving inventory On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ultimate customers, as per the directions of the DRP. 18. Reducing the allocation of branches profit while computing deduction under section 80IC of the Act On the facts and in the circumstances of the case and in law, the learned AO has erred in reducing the profits eligible for deduction under section 801C of the Act by ₹ 14,931,244 on the ground that same is earned from trading activity, as per directions of the DRP. 19. Disallowance of provision for warranty On the facts and in the circumstances of the case and in law, the learned AO has erred in disallowing the provision of warranty amounting to ₹ 106,400,000, as per the directions of the DRP. 20. Initiation of penalty proceedings under section 27(1)(c) of the Act On the facts and in the circumstances of the case and in law, the learned AO has erred in initiating he penalty under section 271(1)(c) of the Act for various disallowances / additions. 3. In these grounds, the issue involved is with regard to transfer pricing adjustment made by the TPO on the amount of royalty paid to by the assessee to its (AE), viz. Matsushita Electric Works Ltd (MEW). 4. It has been informed that this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO was that there was no scientific basis of estimating the amount of provision and the second reason was that during the year under consideration, the assessee had changed its method of accounting whereby the assessee has started making claim by way of provision for warranty whereas upto the last year, the assessee made the claim on the basis of actual expenses incurred on replacements under warranty only. It was noted by the AO that during the year the assessee has also made claim on actual basis amounting to ₹ 5,03,93,000, thus, double claim was made by the assessee. Under these circumstances, the AO disallowed the amount of provision for warranty for ₹ 10,64,00,000. The DRP endorsed the observations of the AO and confirmed the disallowance. 11. During the course of hearing before us, Ld. Counsel made arguments in detail to contest the actions of the lower authorities. It was submitted that provision for warranty was made on the basis of statistics of immediately preceding year. Our attention was drawn on the chart submitted by the assessee showing that in subsequent years up to AY 2014-15, the actual amount of warranty expenses was far more than the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance. It was further submitted by him that alternative prayer can be made by assessee even in absence of as specific ground in view of the judgment of Hon ble Bombay High Court in the case of CIBA of India Ltd. V. CIT 202 ITR 1 (Bom) wherein it was held that Tribunal has ample powers for allowing an alternative claim and the claim of the assessee should not have been turned down by the Tribunal even without any specific ground or claim in this regard before the Tribunal or before the lower authorities. 14. Per contra, Ld. CIT-DR vehemently opposed the arguments of the Ld. Counsel and supported the orders of the lower authorities. It was submitted by him that no scientific basis has been adopted by the assessee to make estimation of the amount of provision. It was submitted that the information provided by way of chart was not only unauthentic but also incorrect on the face of it which shall be evident from the fact that the computation of the provision has been made by extrapolating the figures of 5.5 months i.e. April, 2007 to 15th September, 2007 whereas the factual amount of complete 12 months of the financial year 2007-08 was very much available. But the amount of provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO has doubted that provision has not been computed or estimated on scientific and transparent basis and claim has been made in this year on account of actual basis on account of provision for warranty expenses. The assessee has replied that assessee has changed method of accounting and, therefore, dual claim has been made during the year and there was no other option before the assessee and assessee cannot be denied the benefit of dual claim in the year of transition. With regard to the method of calculation it was fairly submitted before us that correct computation can be re-worked as discussed above and if the computation s made accordingly, then the amount of provision is highly conservative in comparison to the expenditure incurred on actual basis in all the subsequent years i.e. upto the financial year 2013-14. 18. We have considered all the arguments. It is noted by us that in this year assessee changed its method of accounting, as a result of which the amount of provision on account of warranty has been made. It is further noted by us that in all subsequent years assessee has consistently followed the new method of accounting whereby claim has been made by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting a certain method, the same method should be adopted in valuing the opening stock. In other words, the change in the method of valuation, according to the Tribunal, should commence with valuing the opening stock of any previous year by the new method which is to be adopted for valuing the closing stock as well. The assumption so made by the Tribunal appears to be contrary to the normally accepted accounting principles. The value of the closing stock of the preceding year must be the value of the opening stock of the next year. The change, therefore, has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year. If instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change; and correspondingly the value of the opening stock of that year and so on. Whenever there is a change in the method of valuation, there is bound to be some distortion in the calculation of profit in the year in which the change takes place. But if the change is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i.e. ₹ 825.31 crores). Thus, the ratio of the two comes to around 0.61%. Now if we apply the ratio of 0.61% to the turnover of FY 2007-08 which is ₹ 900.52 crores, then we get an amount of ₹ 5,49,85,586 as per the chart provided by the assessee, which is reproduced below:- Particulars Amount in INR Sales for the year ended March 31, 2008 9,00,51,92,314 Rate to be applied as per ratio of warranty expense to sales of previous year 0.61% Provision for warranty 5,49,85,586 Rate of provision for warranty to be applied in FY 2007-08 Particulars Amount in INR Net Replacement cost as on 31 March 2008 5,03,93,000 Sales for financial year ending 31 March 2007 8,25,30,47,487 Ratio based on last years sale 0.61% 22. The said figure has been accepted as correct by Ld. CIT-DR also. Thus, we find it proper that amount of provision should be allowed for the said figure of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to render justice, we direct the AO to examine and grant the claim of the assessee u/s 80IC on the amount of profit which may be recomputed after adding back all the disallowances as are sustained finally. Thus, grounds 13, 14 and 19 are partly allowed in terms of our directions as given above. 27. Ground 15: In this ground, assessee is aggrieved by the action of lower authorities in denying benefit of deduction u/s 80IC on the amount of scrap sales. 28. The brief background is that AO denied benefit of deduction on the amount received the assessee of sales of scrap generated on the ground that receipt on sale of scrap does not form part of the business income since it is not derived from business activity of the industrial undertaking for the purpose of deduction u/s 80IC. 29. During the course of hearing before us, Ld. Counsel of the assessee drew of our attention upon the decision of the Tribunal passed in assesses s own case for AY 2009-10 in ITA NO. 786/M/2014 dated 23/9/2016. 30. Per contra Ld. CIT-DR relied upon the orders of lower authorities and submitted that in absence of proper details disallowance was rightly made by the AO and upheld by the DRP. 31. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on FD of ₹ 1,10,910/-. During the course of hearing, Ld. Counsel relied upon the judgment of Hon ble Supreme Court in the case of CIT v. Karnal Cooperative Sugar Mill Ltd. 243 ITR 2(SC). Per contra, Ld. DR relied upon the orders of lower authorities and also placed reliance on the judgment of Hon ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT 262 ITR 278(SC). 34. We have gone through the facts of the case and find that this issue also came up before the Tribunal for AY 2009-10 wherein the Tribunal held that the claim of deduction u/s 80IC benefit shall not be allowed on the interest income. Therefore, respectfully following the order of the Tribunal for AY 2009-10 this ground is decided against the assessee and the action of AO is upheld. 35. Grounds 17 to 20 were not pressed, hence dismissed. 36. Now, we shall take up appeal for AY 2011-12. The only ground pressed in this appeal is with regard to denial of benefit u/s 80IC in respect of revenue generated through sale of scrap of ₹ 1,23,89,316. During the course of hearing, both the parties jointly stated that facts and circumstances of this case as well as legal position are same as in AY 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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