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TMI Blog2018 (2) TMI 2020X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. Moreover, there is no outflow of the resources required to settle the obligation. In the absence of the obligating event and the outflow of resources required to settle the obligations, we are of the view that estimate of provisions made by the assessee is not on scientific basis and also not reliable. It is also important to note that from assessment year 2011-12, assessee stopped creating provision of warranty. Under these circumstances, we are of the view that in the absence of any claim of warranty in earlier year, provisions of warranty was not required at all. Therefore, it cannot be allowed. We accordingly find force in the observations of the AO though he was required to allow the claim on account of directions of DRP. Therefore, we reverse his findings and direct the AO to disallow the claim of provisions of warranty. TP Adjustment - MAM selection - TNMM or RPM - HELD THAT:-Undisputedly, assessee is a distributor of AO Smith China which is involved in the manufacture of water heaters and sells the water heater imported from AO Smith China in India without making any value addition to the product, in a similar type of case, it has been repeatedly held by the Tribunal an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of warranty of ₹ 41,69,288/- and in this regard the facts borne out from the order of the authorities below are that from the P & L A/c, it was observed that assessee has debited an amount of ₹ 55,66,204/- towards warranty provisions. Out of the above, it was noticed that assessee had not utilized any amount. It was also noticed that assessee had not shown any utilization in any of the earlier years. Therefore, it was proposed to disallow the unutilized portion of provision of warranty amounting to ₹ 55,66,204/- and add back the same to the taxable income. It was contended on behalf of the assessee that provisions are based on the estimation of a specialized warranty accounting team, which estimate the warranty cost for each product country wise and associated cost of providing warranty services. The assessee has also informed that company has scientific principle for ascertaining the warranty cost, which consider the nature of the equipment and periodicity of warranty based on the global principles. He however placed reliance upon the judgment of the Apex Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62 with the submission that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the AO held that creation of provision is not required in the given facts and circumstances of the case. Therefore it should be disallowed. But pursuant to the direction of DRP it was allowed by the AO. 4. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed . heavy reliance upon the judgment of the Apex Court in the case of Rotork Controls India (P.) Ltd. (supra) with the submission that it is appropriate to provide for warranty as percentage of turnover based on past experience as it satisfies the actual concept as well as matching concept. A Provision is a liability which can be measured only by using substantial degree of estimation. Liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprises of resources embodied economy benefit. A past event that leads to present obligation is called as an obligating event. For a liability to qualify for recognition, there must be not only present obligation but aiso the probability of an outflow of resources to settle the obligation. In the instant case, one has to examine whether the working has been robust based on historical data, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983- 84 onwards. Valve Actuators are sophisticated goods. Over the years appellant has been manufacturing Valve Actuators in large numbers. The statistical data in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f provisioning. They are provisioning which relate to the present obligation, it rises out of the obligating event, it involves outflow of the resources and lastly it involves reliable estimation of obligations". If all these conditions are satisfied, the provisions of liability can be allowed. In para 17 of this judgment, their Lordship of the Apex Court has further put emphasis that to allow the provision for liability, liability should be present obligation arising from past events, the settlement of which is expected from the result of the outflow of the resources and in respect of which the reliable estimate is possible of the amount of obligation. If any of the conditions are not fulfilled, the provisions of liabilities cannot be allowed. 8. In the light of above judgment of the Apex Court, it has become abundantly clear that one has to examine whether all the 4 conditions are fulfilled while allowing the claim of provision of liability. In the assessment order, the AO has prepared a table in which details of provisions made and its utilization and reversal was given. For the sake of reference, we are extracting the table as under: SI. No. Asst. Year Opening Warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of warranty. 10. IT(TP)A No.332/Bang/2015 This appeal is preferred by the assessee through which assessment order passed consequent to the direction of DRP is assailed on the following grounds:- Transfer Pricing 1. The Hon'ble Dispute Resolution Panel, Bangalore (Hon'ble DRP) learned Assessing Officer (learned AO) have erred making an addition of ₹ 99,013,4401- to the total income of the Appellant on account of adjustment in the arm's length price (ALP') of the international transactions with its associated enterprises (AEs') and thereby erred in not accepting the transfer pricing documentation / analysis undertaken by the appellant in accordance with provisions of the Income-tax Act, 1961 ('the Act') read with Income-tax Rules, 1962 ('the Rules'). 2. The learned AO has erred in not accepting Resale Price Method (RPM) as the most appropriate method (MAM) for benchmarking the purchase of water heaters transactions from the AE and erred in accepting Transactional Net Margin Method (TNMM). 3. The learned AO has erred in not appreciating that: (1) The losses incurred by the Appellant in the trading operations were not on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he taxpayer being based on unreliable data as RPM is not the most appropriate method for determining the ALP of the international transactions of the taxpayer in the trading segment. The reasons for rejection of the TP document was discussed by the TPO in the show cause notice. The assessee accordingly filed the reply to the showcause notice explaining the nature of activities undertaken by the assessee and the explanation for adopting the RPM as the most appropriate method. The TPO has extracted the explanation furnished by the assessee in support of its claim that RPM is the most appropriate method for determining the ALP for international transactions. The assessee has also placed reliance upon the various judicial pronouncements. The TPO was not convinced with the explanation furnished by the assessee and after rejecting the explanation, the TPO has adopted the TNMM method as the most appropriate method and computed the ALP after taking certain comparables. 13. Aggrieved, the assessee filed objections before the DRP, but did not find favour with it and the DRP confirmed the order of the TPO and thereafter the AO passed the consequential order. 14. Now the assessee is before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration while comparing the net margin. Under the facts and circumstances of the assessee, the net margin comparability is more volatile than the gross margin comparable. In the light of these facts, it was contended that if the cost structure is such that costs are effecting in net profit directly without affecting the price or gross margin, then there can be no two opinions that RPM should be preferred over the TNMM method. In support of these contentions, he placed reliance upon the following judgments:- (1) Horiba India (P.) Ltd. v. Dy. CIT [2017] 81 taxmann.com 209 (Delhi - Trib.) (2) Bose Corporation (P.) Ltd. v. Asstt. CIT [2017] 77 taxmann.com 194/163 ITD 186 (Delhi - Trib.) (3) ITO v. L'Oreal India (P.) Ltd. [2012] 24 taxmann.com 192/53 SOT 263 (URO) (Mum.) (4) Mattel Toys India (P.) Ltd. v. Dy. CIT [2013] 34 taxmann.com 203/144 ITD 76 (Mum. - Trib.). The ld. DR placed reliance upon the order of the AO and the DRP. 16. Having heard the rival submissions and from a careful perusal of the record, we find that undisputedly the assessee is a trading company and carries out distribution and marketing of products of AOS group in India. It imports water filters f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself tested party for the purpose of international transactions. The TPO rejected the transfer pricing study of the assessee and opined that transactional net margin method was to be applied for determining ALP of international transactions under question. While determining the issue as to which is the most appropriate method in case of distributor, the Tribunal has held that the resale price method (RPM) is the most appropriate method and directed the TPO to calculate margin of the comparables by using RMP. The relevant observation of the Tribunal is extracted hereunder for the sake of reference: "8.1 At this juncture, we note the mandate of Rule 10C which defines the 'Most appropriate method' Sub-rule (1) of Rule 10C states that: "For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length in relation to the international transaction." Sub-rule (2) of Rule 10C lists certain factors which should be taken into account in selecting the most appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 of the order under challenge that this method is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities when the goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing, then, this method can be adopted. The findings of fact are based on the materials which have been produced before the Commissioner as also the Tribunal. Further, it was highlighted before the Commissioner as also the Tribunal that the RPM has been accepted by the TPO in the preceding as well as succeeding assessment years. That is in respect of distribution segment activity of the Assessee. In such circumstances, and when no distinguishing features were noted by the Tribunal, it did not commit any error in allowing the Assessee's Appeal. Such findings do not raise any substantial question of law. The Appeal is devoid of merits and is, therefore, dismissed. There would be no orders as to costs." 19. Copy of the order of the Tribunal in the case of L'Oreal India (P.) Ltd., is also placed on record to demonstrate as to under wha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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