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TMI Blog2022 (3) TMI 1455X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 37 - HELD THAT:- As noted that coordinate bench of this Tribunal in assessee s own case for assessment years 2006-07 [ 2016 (5) TMI 1524 - ITAT BANGALORE] , AY 2007-08, AY 201011 [ 2017 (3) TMI 1835 - ITAT BANGALORE] upheld that provision for warranty has been created on a scientific basis and hence allowable as expenditure under section 37 under the Act. Thus in assessee s own case for preceding and subsequent assessment years relying of the decision of the Hon ble Supreme Court in the case of Rotork Controls India Pvt.Ltd [ 2009 (5) TMI 16 - SUPREME COURT] we hold that provision for warranty expenditure is allowable. Disallowance of provision for leave encashment - AO rejected the submission of assessee and held that provision for leave encashment is being unascertained liability was liable to be disallowed under section 43B - HELD THAT:- We note that coordinate bench of this Tribunal in assessee s own case for AY 2011-12 has held that leave encashment is not a contingent liability, and that, the same ought not to be disallowed while computing income under normal provisions of the Act. MAT computation u/s 115JB - warranty and provision for leave encashment as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at arm s length. 2.2. Rejection of internal comparable uncontrolled price selected as the most appropriate method by the Appellant 2.2.1. The Hon ble DRP and learned AO / TPO have erred in law by rejecting the application of Internal Comparable Uncontrolled Price ( CUP ) method selected as the most appropriate method ( MAM ) by the Appellant for benchmarking the international transaction of import of raw materials in relation to manufacturing segment. 2.2.2. The Hon ble DRP and learned AO / TPO have erred in upholding the learned TPO s stand that average of the comparable uncontrolled transaction prices which are similar comparables to each other cannot be taken as the arm s length price under the internal CUP method. 2.2.3. The Hon ble DRP and learned AO / TPO have erred in law and on facts in concluding that the Appellant has adopted industry average rates and, on this basis, rejecting the CUP method, when only the average of the comparable uncontrolled transaction prices under internal CUP method were used by the Appellant. 2.2.4. The learned TPO erred in concluding that comparable data is not available for a substantial portion of the transactions, when he himsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons for the rejection. 2.4.2. The Hon ble DRP and learned AO / TPO have erred in law in adopting the following filters for conducting TP analysis, without appreciating the TP documentation prepared by the Appellant: Rejection of companies having different financial year ending (other than March 31, 2013) or data of the company does not fall within the 12 month-period of April 1, 2012 to March 31, 2013. 2.4.3. The Hon ble DRP has erred in law and on facts in not providing detailed reasons for rejecting the contentions of the Appellant for exclusion of the TPO s comparable companies even though detailed submissions were filed by the Appellant in this regard. 2.4.4. The learned AO / TPO, has erred in law and on facts, in considering the following companies as comparable without considering the detailed submissions of the Appellant Simmtronics Semiconductors Limited; B L G Electronics Limited; Circuit Systems (India) Limited; Fine-Line Circuits Limited; VXL Instruments Limited; Smart Card IT Solutions Limited; Epitome Components Private Limited; Sulakshana Circuits Limited; and Micropack Private Limited 2.4.5. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had not incurred any expenditure on the directions of the AE. 3.1.2 The Hon ble DRP and learned AO / TPO have erred in law and on facts by taking suo-moto cognizance of alleged international transaction in relation to AMP expenditure, alleging that the Appellant is building marketing intangible for its AE. 3.1.3 The Hon ble DRP and learned AO / TPO have erred in law and on facts, in making TP adjustment of INR 82,05,25,509 to the returned loss of the Appellant by assuming the existence of an alleged international transaction of brand promotion services to AE and alleging the same to be not at arm s length in terms of the provisions of sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Rules. 3.1.4 The Hon ble DRP and learned AO / TPO have erred in unilaterally re-characterizing the AMP expenses being payments made by the Appellant to independent third parties as an international transaction under chapter X of the Act, and particularly when the jurisdiction of the TPO is only to compute ALP of the international transaction. 3.1.5 The learned TPO erred in suo-moto benchmarking the alleged international transaction related to the AMP expenses without there b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon ble DRP and learned AO / TPO have erred in law and on facts by disregarding judicial pronouncements in undertaking TP adjustments in relation to AMP. 3.1.13 The Hon ble DRP and learned AO / TPO have evaluated the reasonableness of such expenses, which should not be judged only on the subjective standards but from the point of view of commercial expediency. 3.1.14 The Hon ble DRP and learned AO / TPO have erred in not carrying out the determination of ALP as required under section 92C of the Act read with rule 10D of the Income-tax Rules, 1962. 3.2 Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant craves to raise following grounds of objections on merits. 3.2.1 The Hon ble DRP and learned AO / TPO have erred in law and on facts in concluding that the distribution and AMP are two distinctive functions and requires to be remunerated separately. 3.2.2 The Hon ble DRP and learned AO / TPO have erred in applying the Bright Line Test ( BLT ) as a methodology to quantify the brand promotion service alleged to have been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferences in the intensities of AMP expenditure of the comparable companies vis- -vis the AMP expenditure incurred by The Appellant. 3.2.8 The Hon ble DRP and learned AO / TPO have erred in law and on facts by characterizing the incurrence of AMP expense as a provision of services by the Appellant to its AE requiring a mark-up. 3.2.9 The Hon ble DRP and learned AO / TPO have erred in law and on facts in not appreciating that the Appellant has not provided any value added / brand building services to its AE by incurring AMP expenses, and therefore, no mark-up could have been charged / levied on such expenses, even if the same was to be characterized as an international transaction . 3.2.10 Notwithstanding and without prejudice to the above ground, the Hon ble DRP and learned AO / TPO have erred in recognizing that even if the mark-up is to be applied, the same could have been charged only on the value added expenses incurred by the Appellant for such alleged brand promotion service and not on the entire amount incurred / paid to third party vendors. 3.2.11 The Hon ble DRP and learned AO / TPO have erred in not appreciating that in view of the Appellant being contractual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant. 3.2.17 The Hon ble DRP and learned AO / TPO have erred in law and on facts, in making several observations and findings which are based on incorrect interpretation of law and contrary to facts of the case. 4. Disallowance of provision for warranty 4.1 The Honorable DRP and the learned AO have erred in law in arbitrarily disallowing the provision for warranty amounting to INR 13,40,69,800 claimed as a deduction by the Appellant. 4.2 The Honorable DRP and the learned AO have erred in law by not following the order of the Honourable ITAT in the Appellant s own case for the AY 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12, wherein it was held that the provision for warranty has been created on a scientific basis and that the same should be allowed as a deduction. 4.3 The Honorable DRP and the learned AO have not appreciated the fact that the Appellant maintains 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 ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is consistently followed by the Appellant year on year. 6.2 Addition of provision for leave encashment to the book profits 6.2.1 The Honorable DRP and the learned AO have erred in adding back the provision for leave encashment created during the relevant AY amounting to INR 8,61,790 to the book profit of the Appellant. 6.2.2 The Honorable DRP and the learned AO have erred in law by not following the order of the Honorable ITAT in the Appellant s own case for the AY 2010-11 and AY 2011-12, wherein it was held that the provision for leave encashment is not an unascertained liability and therefore, is not required to be added back to the book profits under section 115JB of the Act. 6.2.3 The Honorable DRP and the learned AO have erred in law and on facts in concluding that the provision for leave encashment is an unascertained liability without appreciating that the provision created is capable of being estimated and substantiated and to this extent the provision for leave encashment cannot be regarded unascertained 6.2.4 Without prejudice to the above, the Honorable DRP and the learned AO have erred on facts by considering the entire sum of INR 8,61,790 as an un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket risk, inventory risk, credit and collection risk, forex risk, warranty and idle capacity risk. Based on the functions and risks performed, the assessee characterized itself as a full- fledged manufacturer for its manufacturing activity. 2.4 The Ld.TPO did not accept the TP analysis by assessee for the reasons given in the show cause notice dated 20.09.2016. He rejected the CUP method adopted by the assessee to its Manufacturing Segment and applied the TNMM as the MAM and determined ALP which resulted in an adjustment of Rs.10,19,77,372/-. 2.5 The Ld.TPO observed that assessee is engaged in the business of manufacturing and distribution of desktop, laptop, servers and smartphones. During the relevant previous year, the assessee incurred expenditure in connection with campaigning, depicting features of new products, providing information to the public about details of product, its specification etc. 2.5.1 In the TP study assessee considered the expenditure so incurred to improve its sale and not to promote the brand of foreign AE. The Ld.TPO called upon assessee to provide various details in support of assessee s claim that the expenditure so incurred was to improv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm's Length Price (ALP) as laid down in Section 92 of the Act. The Appellant also imported parts and components from third parties. The methodology adopted by the Appellant for benchmarking the price paid to the AE for import and components was as follows: Nature of international transaction MAM Value as per books of accounts (Rs.) ALP as determined by the Appellant (Rs.) Remarks Import of raw material CUP 60,51,95,623 59,56,75,480 suo-moto adjustment of Rs.95,20,143/- in the return of Income. The Ld.AR submitted that the assessee during the year under consideration, imported 408 different varieties of products from its AEs which can be identified on the basis of a distinctive code. Out of 408 products, 180 products were purchased from its AEs exclusively while the rest 228 were purchased from AEs as well as from unrelated third-party vendors. With respect to the imports from AEs as well as from unrelated third-party vendors, the Ld.AR submitted that the assessee conducted a search (based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication of TNMM as MAM and methodology adopted to determine ALP under the TNMM by the TPO. On receipt of the DRP order the Ld.AO passed the final assessment order making the adition in the hands of the assessee. Against the final assessment order, the assessee raised the issue before this Tribunal. At the outset the Ld.AR submitted that this issue has been considered by Coordinate Bench of this Tribunal in assessee s own case in following assessment years. IT(TP)A No. 582/Bang/2015 for A.Y. 2006-07 by order dated 30.05.2016 IT(TP)A Nos. 74 88/Bang/2014 for A.Y. 2009-10 by order dated 06.07.2018 IT(TP)A Nos. 511, 580 581/Bang/2015 1307/Bang/2011 for A.Ys. 2007-08 2010-11 by order dated 31.03.2017 IT(TP)A No. 373/Bang/2016 for A.Y. 2011-12 by order dated 21.10.2016 IT(TP)A No. 2444/Bang/2019 for A.Y. 2015-16 by order dated 06.03.2020 We refer to the order passed by this Tribunal for A.Y. 2015-16 which is the recent most order wherein this Tribunal decided this issue on identical facts in assessee s own case by observing as under. 9. Aggrieved by the order of the DRP, the Assessee has raised Grd.No.II before the Tribunal. We shall firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, that do not require adjudication. Ground no.3 relates to the treatment of AMP expenses pertaining to trading segment as an international transaction and determining the ALP in respect of the same. The submission of the Ld.AR is that CUP should be accepted as the MAM. He has tabulated the objections to each of the reasons put forth by the Ld.TPO/DRP for the rejection of CUP as the MAM as under: Sl No Reasons for rejection of CUP as the MAM Assessees contention 1. Non-availability of reliable data in order to compare the degree of comparability between the international transaction and uncontrolled transactions The Assessee imports raw materials from both AEs as well as unrelated vendors for the manufacture of PCs. The revenue did not consider the fact that the parts, being components have a unique identity and bear serial numbers or codes by which they are known. The Assessee documented the analyses in respect of the comparison of the prices for all the products that have been imported from its AE. Hence the reasons provided in the rejection of CUP is not based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the components have distinctive codes by which they are known in the industry and the measurement of the prices is not subjective; The ruling of the ITAT was based on the fact that the taxpayer had received income from services rendered to its AE. In the present case, the Assessee s transactions pertain to expenses that have been incurred; and Lastly, in the case relied upon by learned TPO, the taxpayer relied upon external CUP whereas the Assessee has relied upon internal CUP in benchmarking its transaction. 4. There is no publicly available information on prices charged in independent transactions of similar or identical nature, so external CUP cannot be applied. For the application of the CUP method, the primary condition to be satisfied is that there should exist a transaction for an identical product between two unrelated parties. In a wholesale business scenario, for obvious reasons, the transaction prices of products are not publicly available since such prices are negotiated closely between the parties and would be binding only on the parties. However, where the transaction involves the Assessee hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate 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 illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction (Emphasis supplied) Based on the above observations in assessee s own case for A.Y. 2015-16 (supra), this Tribunal recorded a finding as under: 17 - We have considered his submission and are of the view that it would be just and appropriate to set aside the issue of determination of net margin of the Assessee and in the trading segment, as claimed by the Assessee in Scenario-3 before the TPO. If the margins are accepted as at arm s length and then applying the principles laid down by the Hon ble Delhi High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee stands allowed. As we have decided on the above grounds in favor of assessee, the remaining sub grounds become infructuous. Ground NO.4 DISALLOWANCE OF PROVISION FOR WARRANTY During the assessment proceedings, the Ld.AO observed that assessee created provision of warranty. The assessee was called upon by the Ld.AO to explain as to why the provision should not be disallowed. In response, vide submission dated 6/12/2016 and 7/12/2016, the assessee submitted that, the provision for warranty of Rs.13,40,69,800/- was created based on the total number of warranty obligations outstanding as of 31/03/2013. It was also submitted that, the methodology of arriving at provision and the computation of provision for warranty based on such methodology and as per the principles laid down by the Hon ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT, reported in [2009] 180 Taxman 422/314 ITR 62 (SC) was also submitted. Assessee also relied on the decision of coordinate bench of this Tribunal in assessee s own case for AY 2006-07 and AY 2011-12, wherein it was held that the assessee has followed a scientific methodology for creation of provision for warran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extract of the orders passed by coordinate bench of this Tribunal in assessee s own case for assessment years 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12, are reproduced as under: AY 2006-07(supra) 16- We are of the opinion that the three conditions set out by the Hon ble Apex Court in the case of Rotork Controls India (Pvt) Ltd have been satisfied by the assessee, viz., establishing that there is a present obligation on account of a past event, working out the probable estimate of the outflow of the resources required and substantiating the reliability of such estimate. Especially so since the assessee was mandatorily required to follow AS-I and principles of prudence stipulated in such AS-I required provisioning for all known liabilities even if it could not be determined with certainty, but was made based on available data. We therefore delete the addition made by the AO disallowing the provision for warranty. AY 2007-08(supra) Placing the reliance on the assessee s own case for the AY 201112 the coordinate bench of this Tribunal concluded as under: 5. Thus the Tribunal has taken a consistent view on this issue. The Id. Senior Counsel has also reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round NO.5 DISALLOWANCE OF PROVISION FOR LEAVE ENCASHMENT During the course of the assessment proceedings, the Ld.AO observed the policy of provision for leave encashment followed by the assessee. The assessee was called upon to explain the same. In response, vide its submission dated 1/12/2016, assessee submitted that the as per the leave encashment policy, every employee is entitled to a fixed number of leaves every year and the employees are entitled to en-cash the available balance of leaves, subject to certain conditions, at the time of resignation/ retirement. It was submitted that in order to provide for such leave encashment expenses, the assessee creates provision for leave encashment every year based on the salary earned by the employees and their unutilized leave balance. In such manner, it was submitted that the net provision for leave encashment created during the year amounted to Rs.8,61,790/-. It was submitted that the provision for has been created as per the provisions of AS 15, which is required to be followed by the Company as per section 133 of the Companies Act, 2013. The Ld.AO rejected the submission of assessee and held that provision for leave en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for leave encashment not paid on or before filing the return of income. On the contrary, the Ld.DR relied on orders passed by authorities below. We note that coordinate bench of this Tribunal in assessee s own case for AY 2011-12(supra) has held that leave encashment is not a contingent liability, and that, the same ought not to be disallowed while computing income under normal provisions of the Act. The relevant extract of the order is as below: AY 2011-12(supra) 11.1 Before us, learned counsel for the assessee submitted that provision for gratuity was allowed as deduction in the proceedings u/s 154 of the Act and therefore, not pressed. As regards provision for leave encashment, he submitted that it is not a contingent provision and is allowable as deduction in view of the decision of the Hon ble Supreme Court in the case of Bharat Earth Movers vs. CIT (supra). As regards provision for warranty, 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 ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of ₹ 5,10,000/- towards gratuity would be covered under Clause (c) to Explanation 1 to Section 115JB of the Act. The Tribunal relied on the decision of the Bombay High Court in case of CIT v. Echjay Forgings (P.) Ltd. [2001] 251 ITR 15/116 Taxman 322 and confirmed the view of the CIT(A). 17. Having heard learned counsel for the parties and having perused documents on record, we notice that CIT(A) as well as the Tribunal both noted that such provision for payment of gratuity was made on the basis of actuarial valuation method to this aspect. The revenue has not been able to make any dispute. If we proceed on that basis, law to our mind, seems fairly well settled. Bombay High Court in case of Echjay Forgings (P.) Ltd (supra) in the context of similar provisions made in Section 115JB of the Act examined whether the provision of gratuity liability of a company is required to added back to its book profit. In this context, it was held that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 in Volume II. We are therefore of the opinion that the issue needs to be verified in the light of the reconciliation placed in the paper book by the Ld.AO having regards to the observation by the coordinate bench of this Tribunal in assessee s own case for AY 2011-12(supra). Accordingly Ground no.5 stands allowed for statistical purposes. Ground NO. 6 ADJUSTMENTS TO BOOK PROFIT UNDER SECTION 115JB OF THE ACT The Ld.AO treated the provision for warranty and provision for leave encashment as an 'unascertained liability' and added the same to book profits under section 115JB of the Act. The DRP has agreed with the contention of the AO and rejected the objections. In the preceding paras, following the ration laid down by Hon ble Supreme Court in case of Rotork Control(supra) we have held that the provision for warranty cannot be treated as unascertained liability. In respect of provision of leave encashment, this Tribunal in assessee s own case for AY 2011-12(supra) has observed as under: Respectfully following the above decision, we hold that provision for leave encashment need not to be added back to book profits for the purpose of determin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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