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TMI Blog2017 (3) TMI 1835X X X X Extracts X X X X X X X X Extracts X X X X ..... al in assessee's own case for the Assessment Year 2006-07 and again for the Assessment Year 2008-09 [ 2016 (5) TMI 1524 - ITAT BANGALORE ] - It is pertinent to note that the market support service charges are paid under the same agreement as for the Assessment Yea₹ 2006-07 2008-09. Therefore following the decision of this Tribunal for the earlier Assessment Year as well as in the subsequent Assessment Year we decide this issue in favour of the assessee and allow the claim of the assessee. Disallowance of superannuation fund - fund was not approved by the competent authority - CIT (Appeals) has confirmed the disallowance made by the Assessing Officer on the reason that though the approval was given on 13.7.2017 w.e.f. 13.03.2007 however the payment was made on 7.4.2007 when the assessee was yet to get the approval - HELD THAT:- From finding of the CIT (Appeals) it is clear that the approval was given to the fund on 13.07.2007 with retrospective effect from 13.3.2007. Therefore the approval to the assessee was given and effective before the end of the financial year relevant to the assessment year under consideration. The assessee paid the amount to the credit of the Govt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference of the decision of this Tribunal has been made only to fortify the finding of the DRP. We further note that the Tribunal in assessee's own case for the Assessment Yea₹ 2007-08 2008-09 while dealing with an identical issue [ 2016 (5) TMI 1524 - ITAT BANGALORE ] - we delete the addition made by the TPO/A.O. on account of transfer pricing adjustment. Warranty provision as well as leave encashment while computing the book profit under Section 115JB - HELD THAT:- As regards the adjustment on account of warranty provision while computing the book profit under Section 115JB of the Act, in view of our finding on the issue of allowability of warranty provision the same cannot be treated as uncertain liability/provision. As regards the provision for leave encashment though the said claim was not allowable in view of the provision of Section 43B however in view of the decision of Hon'ble Supreme Court in the case of BEML [ 2000 (8) TMI 4 - SUPREME COURT ] this is a certain liability though payable in future we further note that the Tribunal in assessee's own case for the Assessment Year 2011-12 we decide this ground in favour of the assessee and delete the addition m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Apple India (P) Ltd. 3 Disallowance of Marketing support fees as capital expenditure 3.1 The learned CIT(A)-I has erred in law in arbitrarily disallowing an amount of ₹ 139,237,553 being the amounts paid to IBM as marketing support fees without considering the fact that Lenovo India, in its first few years of operation in India, did not have marketing and logistics network in India for the sale of desktops and laptops and therefore it was required to contract, for a period of five years, with IBM India for provision of logistic support and sales force for marketing and distribution of Lenovo India s products to retain the market share in India. 3.2 The learned CIT(A)-I has erred in law and on facts in arbitrarily concluding that marketing support fee paid by Lenovo India is capital in nature. 3.3 The learned CIT(A)-I has erred in law and on facts in relying on the cases of Assam Bengal Cement Co. Ltd.1 and Woodhead and Sons Ltd.2 as the facts in those cases are different from Lenovo India s case. 4 Disallowance of Superannuation fund 4.1 The learned CIT(A)-I has erred in law in taxing an amount of ₹ 4,073,620 towards disallowance of superannuation fund p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection, the findings of the co-ordinate bench in the assessee s own case for assessment year 2006-07 are relevant which are quoted below: 16. We have perused the materials and heard the rival contentions. Question before us is whether assessee had made the provisioning for warranty in a scientific manner. It is not disputed that in the impugned assessment year it had started doing the business of sale of laptops and desktops. Obviously assessee had no historical data with it. It is also not disputed that assessee had taken over this business from IBM, who had substantial experience in such business. Hence if the assessee relied on the methodology followed by IBM for working out the warranty provision we cannot say that it was incorrect. There is no case for the Revenue that any provisioning made by IBM in respect of such business in any earlier years were disallowed for a reason that it was unscientific. It is true that assessee had adopted two factors namely, repair action rate and cost per claim from IBM data available at Asia Pacific Level. It might also be true that assessee had not produced records relating to IBM to show that these rates were correctly worked out by IBM. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble jurisdictional High Court in the case of CIT Vs. IBM India Limited for the Assessment Year 1998-99 wherein the Hon'ble Supreme Court has held that the conditions as stipulated by the Hon'ble Supreme Court in the decision in the case of Rotork Controls India Pvt. Ltd. Vs. CIT (supra) were found to be fulfilled and no case of interference with the finding of the Tribunal is made out. It is pertinent to note that in this case the assessee has acquired this business from IBM and for the first year after acquisition i.e. for the Assessment Year 2006-07, the claim of the assessee for provision of warranty was based on the historical data of IBM. Thus in view of the above facts and circumstances of the case as well as by following the decision of this Tribunal in assessee's own case, we decide this issue in favour of the assessee and allow the claim of the assessee on account of provision for warranty which was found to be based on scientific basis and method. 6. Ground No.3 is regarding Transfer Pricing Adjustment disallowance of marketing support service charges paid by the assessee to IBM. 7. We have heard the learned Senior Counsel for the assessee as well as l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the services description attachment to facilitate the sale of the products by the assessee and to extend services to the customers through one or more of its subsidiaries or 3 rd parties under contract with the seller/IBM or one of its subsidiaries. Thus, it is clear that the services rendered by IBM are for smooth and efficient carrying on of the business of the assessee for a period of 5 years. This might give an enduring benefit to the assessee but every activity which gives enduring benefit to the assessee would not get the character of capital nature. It has been held by the various high courts in a catena of decisions that the enduring benefit is not the only criteria to decide the nature and character of an expenditure. The necessary test is whether it is for acquisition of any capital asset or for the purpose of carrying on the business, deriving revenue from it. The marketing support services cannot however be considered as acquisition of a capital asset. The support services are for the purpose of sale of the products manufactured by the assessee and, therefore, it is clearly established that it is for efficient running of the business and deriving revenues there-fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record. The CIT (Appeals) has confirmed the disallowance by citing the reasons in para 7.2 as under : 7.2 During appellate hearing the A Rs filed a copy of approval which shows that approval was given on 13.7.2007 w.r.e from 13.3.2007. On enquiry it was also pointed out that on 7.4.2007 such fund was paid to the credit of Govt. I consider this an impossibility because on 7.4.2007, the appellant was yet to get the approval and the number. Thus on the principles of impossibly the deduction is not allowed. Hence addition is upheld. Grounds of appeal is dismissed. From the above finding of the CIT (Appeals) it is clear that the approval was given to the fund on 13.07.2007 with retrospective effect from 13.3.2007. Therefore the approval to the assessee was given and effective before the end of the financial year relevant to the assessment year under consideration. The assessee paid the amount to the credit of the Govt. on 7.4.2007 which is well within the limit as prescribed under Section 43B of the Act. Therefore once the assessee has paid the amount in the fund before the time period prescribed under Section 43B and the fund was approved w.e.f. 13.3.2007 then there is no plausible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 2008-09 have been accepted to be at arm s length, the TP analysis conducted by the appellant for AY 2006-07 under the CUP method should also be accepted to be at ALP. e. The learned AO and the TPO have erred in not recognizing the settled principle in law that the onus and right of choosing the MAM for benchmarking the transaction rests with the Appellant and that the method cannot be rejected by the AO/TPO arbitrarily or without adequate reasons. It would be evident from the TP and assessment orders for AY 2007-08 and 2008-09 in the appellant s case that the appellant s transactions have been accepted to be at arm s length and there is no rejection of the MAM adopted by the appellant. f. Without prejudice to the other grounds of appeal, the learned AO and the TPO have erred in not considering that the DRP had not merely followed the decision of the ITAT in the appellant s case for AY 2006-07, but had independently examined the appellant s facts for the year and upheld the CUP method as the MAM. 3. Rejection of the transfer pricing documentation of the Appellant a. Without prejudice to the above, the learned TPO has erred in law and on facts in rejecting the Transfer Pricing ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... norable DRP and learned AO / TPO has erred in not granting risk adjustment based on comparability adjustments while adjudicating the matter at TNMM 8. Disallowance of provision for warranty a. The DRP and the learned AO have erred in law in arbitrarily disallowing the provision for warranty amounting to ₹ 28,87,73,978 claimed as a deduction by Lenovo (India) Private Limited ( Lenovo India or the Appellant ). b. The Honorable DRP and the learned AO have not appreciated the fact that Lenovo Indiamaintains its books on a mercantile basis of accounting and that the said warranty provision has been created on a scientific manner followed consistently over the years, having due regard to the nature of activity, its global warranty accrual processes and the industry requirement in which the Appellant operates. c. The Honorable DRP and the learned AO haveerred on facts in failing to consider that Lenovo India has provided for warranty on a scientific and consistent manner every year applying the principles laid out by the Honourable Supreme Court in the case of Rotork Controls India Private Limited3 and therefore such expenditure is an allowable deduction under section 37 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es leave to add, alter, vary, omit, substitute or amend the above grounds, at any time before or at the time of hearing of the appeal. Each of the above objections is independent and without prejudice to the other grounds preferred by the Appellant. 15. Ground No.1 is general in nature and does not require any specific adjudication. 16. Ground No.2 is regarding MAM and Transfer Pricing Adjustment. 17. At the outset, ld. Senior Counsel for the assessee submitted that the DRP accepted the objections of the assessee regarding the CUP as MAM instead of TNMM adopted by the TPO. However the TPO/A.O. while passing the final order in pursuant to the directions of the DRP have not given effect to the directions on this issue. He has further contended that the DRP has decided this issue in detail and passed directions in para 4.6 but the TPO/Assessing Officer has not followed the directions of the DRP while passing the final order. Consequently, the assessee filed a petition under Section 154 of the Act which was also dismissed by the TPO/A.O. Thus the assessee has also filed a separate appeal against the order passed under Section 154. The ld. Senior Counsel for the assessee has pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the learned Departmental Representative that the DRP did not understood the order of the Tribunal in correct prospective, we are of the view that even if the directions of the DRP are not acceptable to the department and may be contrary to the precedent, the remedy is only to challenge the same in the appeal and not to refuse to give effect the same. However we find that the DRP has duly considered this issue in paras 4.5 4.6 as under : Thus it is clear that the DRP has taken an independent view and not merely followed the decision of this Tribunal. The reference of the decision of this Tribunal has been made only to fortify the finding of the DRP. We further note that the Tribunal in assessee's own case for the Assessment Years 2007-08 2008-09 while dealing with an identical issue vide order dt.30.05.2015 has held in para 7 as under : 07. Thereafter on 30.01.2014, TPO had passed a fresh order u/s.92CA of the Act, purportedly to comply with the directions of the Tribunal. In the said order, TPO stated that assessee had relied on RPM method for A. Ys. 2007-08 and 2008-09, whereas in the assessment for these assessment years TNMM was adopted by the Revenue. Thus as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions for purposes of determining Arm's Length Price (ALP). The TPO has proceeded in his impugned order down the second path i.e. with regard to MAM. This was clearly not his mandate. As far as the transaction in question was concerned, the conclusion of the TPOs in both AYs 2007-08 and 2008-09 was that the relevant transactions were at Arm's length. This is the verification which was expected by the Hon'ble ITAT. The objections of the tax payer are found to be in order and the TPO's reiteration of the position adopted in his original order dt. 28.09.2010 is inappropriate. However, a reading of the final assessment order passed by the AO on 30.01.2015 show that TPO had pursuant to the DRP directions passed an order dt.29.01.2015 not complying with the directions of the DRP. AO had therefore persisted with the same adjustment that he had done earlier. Section 144C which dwells on the powers of the DRP, states as under at sub-section (10): 144C(10) : Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. In view of the above discussion as well as the decision of this Tribunal in assessee's own case, we delete the additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the assessee submitted that since same is allowable as business expenditure, it cannot be added to book profits. 11.2 On the other hand, ld.CIT(DR) placed reliance on the orders of the lower authorities. 12. The only issue relates to addition of provision for leave encashment and the provision for warranty expenditure added to book profits while computing tax liability u/s 115JB of the Act. As regards provision for warranty expenditure, we had already held that it is not a contingent liability and hence is allowable as deduction. Therefore, the question of addition to book profits does not arise. As regards provision for leave encashment, following the decision of the Hon ble Gujarat High Court in the case of DCIT vs. Inox Leisure Ltd. (351 ITR 314), the same is allowable as deduction. The Hon ble Gujarat High Court, after considering the decision of the Hon ble Apex Court in the case of Bharat Earth Movers (supra) held as follows: 16. Coming to the question No. 2, we notice that the same arises out of the Tribunal's decision to uphold the CIT(A)'s view that the provision of ₹ 5,10,000/- made by the assessee towards its gratuity liability cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee had made the provision for gratuity on the basis of actuarial calculations. He, therefore, cannot be said that the provision for gratuity is not ascertained liability. 18. In case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 the Apex Court held that the amounts set apart by an assessee to meet its liability on account of leave encashment of employees is not a contingent liability. It was observed that what should be certain is the incurring of the liability which should also be estimated with reasonable certainty though the actual quantification may not be possible then. Its requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. 19. Likewise in case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the Apex Court examined the question whether it is legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct the same in profit and loss account while working out the net profit of a company and further whether such appropriation amounts to a reserve or provision. The Supreme Court held that an assessee can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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