9911796707
TMI Blog2022 (12) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... was picked up for scrutiny. During the course of the assessment, the AO made a reference of international transactions entered into by the Assessee to the Transfer Pricing Officer ("the TPO") for determining the Arm's Length Price ("ALP") of such transactions under section 92CA of the Income-tax Act, 1961 ("the Act"). The assessee filed submissions on the information / details called for. On conclusion of the Transfer Pricing ("TP") proceedings, the TPO passed an order dated 23.10.2017 u/s. 92CA of the Act proposing the following adjustments: Particulars Amount (In INR) Adjustment to the manufacturing segment 13,52,88,149 Adjustment on account of excess AMP expenditure 123,25,95,287 Assessed Income 136,78,83,436 3. The AO, taking note of the above, concluded the assessment proceedings as per the provisions of section 143(3) r.w. section 92CA of the Act and forwarded a Draft Assessment Order ("DAO") to Assessee determining the revised total income at INR 113,97,14,831 without setting off brought forward losses and unabsorbed depreciation, as against the returned loss of INR 24,92,08,416. Further, the AO made the following disallowances in addition to the TP adjustments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prices paid during the year for the products imported from associated enterprises. Each of these parts is identified based on a distinctive product code. The taxpayer has imported 581 different varieties of products from its AEs which can be identified from distinctive codes. Out of the 581 products, 348 products were purchased from the AEs exclusively whereas the rest 223 were purchased from the AEs as well as the third party vendors. With respect to the imports from associated enterprises, the Company conducted a search (based on product code) to identify similar products, imported from unrelated vendors for the financial year 2013-14 and the weighted average price per unit for these products. This process resulted in the identification of potential internal comparables for 233 of the products imported. A detailed analysis is as follow: Products imported from associated enterprises only With respect to the imports made only from associated enterprises, the prices paid by associated enterprises to its vendors were considered. * Out of the 348 products, 76 products were sold by the AEs on a cost to cost basis. Hence the same were considered to be at ALP. * On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing segment (GI-1) 12,57,27,686 7. The assessee raised objections before the DRP. The DRP gave partial relief to the extent of revision in the PLI's of comparable companies considered for TP adjustment. The revised average of OP/OC of comparables came to 3.51% and hence the AO in the final order revised the TP adjustment towards manufacturing segment to Rs.10,88,68,102.. 8. The assessee is in appeal before the Tribunal against the final order of the AO. The learned AR made the following submissions:- * The assessee imported components both from AEs as well as unrelated vendors. * These components have a unique identity and bear serial numbers of codes by which they are identified. * The assessee has documented he comparability analysis in respect of the comparison of the prices for all the components that have been imported from its AEs. 9. The learned AR also brought to our attention that the Co-ordinate Bench of ITAT in assessee's own case for AYs 2006-07 to 2010-11, 2012- 13 to 2013-14 and 2015-16 has upheld CUP method as MAM. 10. We have heard the rival submissions and perused the material on record. The Co-ordinate Bench of the Tribunal in assessee's o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 12. The assessee through these grounds is contending the treatment of alleged excess AMP expenditure pertaining to trading segment as a separate international transaction and making the consequent TP adjustment. The assessee raised grounds contending treatment of AMP expenditure as a separate international transaction 11 to 21 and also on merits Ground 22 to 33. 13. We will first take up the issue of treatment of AMP expenditure as international transaction. The TPO noticed that for the year under consideration, the assessee has incurred substantial amount towards AMP expenditure in comparison to the earlier years. These expenses are incurred by the assessee towards campaigning, depicting features of new products, providing information to the public about the details of product, specifications, etc. The aforesaid expenses, according to the assessee, are entirely attributable to products sold in India and not towards any brand promotion of foreign AE. The TPO was of the view that in the trading segment, the activities are not confined to trading alone, but includes advertisement, marketing and sales promotion which are value addition functions for which the assessee is not adeq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 15. The Hon'ble High Court also held that, "where the learned AO/TPO accepts comparables as a bundled transaction, AMP expenditure cannot be treated as a separate international transaction. The relevant extract of the ruling is as follows:- "...(v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o necessity to remit the issue back to the TPO. 19. In the present case, the TPO has not recorded specifically that he is satisfied about the ALP of trading segment. Given this, we respectfully follow the decision of the Co-ordinate Bench in assessee's own case for AY 2015-16 and remit the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method, and if as a result, the price received is found to be at arm's length, no separate addition needs to be made. The assessee may be given a reasonable opportunity of being heard. In view of this conclusion, we are of the considered view that grounds (22) to (33) does not warrant adjudication at this stage. Further ground (34) to (36) are general and subsumed in the main TP grounds, hence, dismissed as not pressed. Disallowance of provision for warranty (Ground V (37) to (42). 20. During the year the assessee has debited the P & L account with an amount of Rs.1,97,19,70,205 under the head "warranty expenses". The warranty utilized during the period is Rs.1,90,52,83,337. The provision for warranty is created as the assessee provides warranty period of one to four years against the manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zation of warranty and concluded that the assessee has been using only 55% of the total provision. The AO noticed the mismatch between the actual expenditure and the provision created and concluded that provision created is not done scientifically and not reliable. He also made an analysis of the warranty provision with turnover for earlier years and concluded that the sales and the warranty provision are not proportionate i.e., there is higher movement of warranty in few years when the actual sales had come down. This was another reason to conclude that the method of provision for warranty is not reliable. The AO therefore disallowed the difference between the provision made during the year and actual utilization Rs.6,66,86,868 i.e., [Rs.1,97,19,70,205 - Rs.1,90,52,83,337]. The DRP confirmed the disallowance. Aggrieved the assessee is in appeal before the Tribunal. 23. 23. We notice that the Co-ordinate Bench in assessee's own case for Assessment Year 2015-16 has dealt with the same issue and held as under:- "31. We have heard the rival submissions. The learned counsel for the Assessee submitted before us that the approach of the AO and the DRP is flawed because they have compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87 551,839,359 Warranty Utilisation Closing balance of provision required based on machine months under warranty 402,712,947 421,922,899 Total 824,635,546 Total 824,635,846 FY 2007-08 Particulars Debits (Rs.) Particulars Credits (Rs.) Opening balance Warranty provisions during the year 421,922,899 612,180,442 Warranty Utilisation Closing balance of provision required based on machine months under warranty 519,174,867 514,928,474 Total 1,034,103,341 Total 1,034,103,341 FY 2008-09 Particulars Debits (Rs.) Particulars Credits (Rs.) Opening balance Warranty provisions during the year 514,928,474 1,087,940,662 Warranty Utilisation Closing balance of provision required based on machine months under warranty 1,039,428,777 563,440,359 Total 1,602,869,136 Total 1,602,869,136 FY 2009-10 Particulars Debits (Rs.) Particulars Credits (Rs.) Opening balance Warranty provisions during the year 563,440,359 972,025,066 Warranty Utilisation Closing balance of provision required based on machine months under warran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the AO/DRP. 33. We have carefully considered the rival submissions. The basis for creating provision adopted by the Assessee is Machine months x repair rate x cost per claim Where: Machine Months = Factor of the unexpired warrant period in months and the number of PCs which are under warranty at the end of the year Repair Rate = Percentage of claims out of the total sales made on the historical data for the region. Cost per claim =Average expected repair cost per PC on historical data for the region. 34. The hypothetical computation by the revenue authorities of percentage of actual claim for the year and provision made for the very same year, cannot be sustained because the basis of providing warranty is Machine months x repair rate x cost per claim. The tribunal has already pointed out the flaw in the approach of the revenue authorities in its order for AY 2006-07 that the basis should be the actual expenditure incurred on discharge of warranty claims in future which is much more than the provision made in an earlier year. The warranty obligation is not just for one year and it spreads over a period of more than 1 year and therefore the comparison as done by the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncing its existence and its business of providing advertising and marketing related services. 4. Screenshot of the clientele of Mudhranaa which includes the assessee, Lenovo India. 5. Extract of balance sheet of Mudhranaa (pg 965 to 1036 of PB). 28. Further, before the DRP the assessee submitted the bank statement for AY 2014-15 and payment ledger extract of Mudhranaa in the books of the assessee [pg. 1373 to 1385 of PB]. The ld. AR submitted that the Tribunal in the assessee's own case for AYs 2006-07, 2007-08, 2010-11 & 2011-12 has held that provision for warranty is created on a scientific basis. 29. The learned DR submitted the report from MCA to substantiate that the company Mudhrana Creations is struck off from the register of Registrar of Companies and supported the decision of the lower authorities. 30. We heard the rival submissions and perused the material on record. For the purpose of an expenditure to be claimed under section 37(1), the expenses should not be capital in nature and should have been incurred wholly and exclusively for the purpose of business. The assessee has submitted various details, including the details of tax deducted at source, bank statem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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