9911796707
TMI Blog2023 (8) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... rary to the facts and circumstances of the present case. II. TP adjustment of INR 4,27,47,621 in relation to manufacturing segment: 2. The Honourable DRP and the learned AO / TPO have erred in law and on facts in making transfer pricing ("TP") adjustment of INR 4,27,47,621 to the returned income of the Appellant and in holding that the international transactions undertaken by the Appellant with its associated enterprises ("AEs") in the manufacturing segment were not at arm's length. Rejection of Internal Comparable Uncontrolled Price Method adopted as the most appropriate method by the Appellant: 3. The Honourable DRP and the learned AO / TPO have erred in law by rejecting the application of Internal Comparable Uncontrolled Price ("Internal 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, without giving any cogent and valid reasons for such rejection. 4. The Honourable DRP and the learned AO / TPO have erred in rejecting the Internal CUP method as MAM when the same has been upheld in Appellant's own case in preceding years as be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies which are not comparable to the Appellant due to reasons including functional dissimilarity, presence of significant R&D etc.: a. Bhagwati Products Limited b. Exicom Tele-Systems Limited 11. The learned AO / TPO has erred in law and on facts in not accepting the following companies which are comparable to the Appellant and thereby not considering the detailed submissions of the Appellant. Further, the learned TPO has not provided any reasons for the same in the TP Order: a. Hitachi Hi-Rel Power Electronics Pvt. Ltd b. Powersonic Electric Solution India Pvt. Ltd c. V X L Instruments Ltd d. CCS Infotech Limited e. TVS Electronics Limited 12. The Honourable DRP and the learned AO / TPO have committed arithmetical errors in computing the margin of the following company: a. Exicom Tele-Systems Limited 13. The Honourable DRP and the learned AO / TPO have erred in law by not granting appropriate favourable economic adjustments (including the working capital adjustment) while calculating the arm's length margin for final set of comparable companies under the TNMM for the manufacturing segment. III. TP adjustment of INR 125,54,51,517 on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able DRP and the learned AO / TPO have erred in law and on facts by not appreciating that the Appellant is a distributor of products imported from its AEs on a principal-to- principal basis, and hence has incurred the AMP expenses solely for improving its business market and increasing the sales of its products in India. 22. The Honourable DRP and the learned AO / TPO have failed to appreciate that the Appellant has been uninterruptedly using the said brand for the last several years and till date, thus, all benefits endured to the Appellant, for which the Appellant has not even been paying any royalty to its AE. Consequently, for all purposes the Appellant is the sole beneficiary of all the benefits of AMP expenditure incurred during financial year ending 31 March 2016. 23. The Honourable DRP and the learned AO / TPO have erred in law and on facts, by holding that the Appellant by incurring excessive AMP expenditure has resulted in creation of marketing intangible in favor of the AE, for which it should be compensated by the AE. 24. The Honourable DRP and the learned AO / TPO have erred in law and on facts by disregarding judicial pronouncements in undertaking TP adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e within the tolerance band of the adjusted net margin of the comparable companies. 29. The Honourable DRP and learned AO/TPO have erred in applying the Bright Line Test as a methodology to quantify the brand promotion service alleged to have been rendered by the Appellant to its AE. Further, the Honourable DRP and learned AO / TPO have erred in selecting companies that are not comparable to the intensity of AMP functions of the Appellant for computing the AMP/Sales ratio and thereby considered companies that have very low AMP/Sales ratio. 29. The Honourable DRP and the 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. 30. The Honourable DRP and the learned AO / TPO have erred in law and on facts by characterizing the incurrence of AMP expense as a provision of brand promotion services by the Appellant to its AE requiring a mark-up. 31. Without prejudice to the other grounds, the Honourable DRP and the 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess realities. 38. The Honourable DRP and the 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. V. Disallowance of provision for warranty 39. The Honourable DRP and the learned AO have erred in law in arbitrarily disallowing the provision for warranty amounting to INR 185,94,26,047 claimed as a deduction by the Appellant, holding the same to be contingent and unascertainable in nature. 40. The Honourable DRP and the learned AO have erred in law by not following the order of the Honourable Karnataka High Court ("HC") in the Appellant's own case for AY 2007-08 and AY 2011-12 and Honourable ITAT in the Appellant's own case for the AY 2006-07, AY 2007-08, AY 2010-11, AY 2011-12 and AY 2015-16, 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. 41. The Honourable 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 scienti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on facts by treating the unrealized foreign exchange loss as marked-to-market loss, arising to the Appellant on account of restatement of financial instruments, i.e., forex derivatives/ forward contracts and thereby, categorizing the same to be 'speculative' under section 43(5) of the Act, disregarding the fact that the unrealized foreign exchange loss is on account of restatement of debtors, creditors and other trade advances, which does not fall under the purview of section 43(5) of the Act. 49. The Honourable DRP and learned AO have erred in not appreciating that the unrealized foreign exchange gain at the time of realization, if any, would be duly offered to tax. 50. The Honourable DRP and learned AO have not appreciated the fact that the treatment of unrealized foreign exchange loss is in line with Accounting Standard ("AS")-11 and also, the principles of 'prudence' provided in AS-1, which is required to be complied by the Appellant under section 145(2) of the Act. 51. The Honourable DRP and learned AO have erred in not appreciating the fact that the foreign exchange loss incurred in the course of Lenovo India's business operations and is in the nature of revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business on account of restatement of debtors, creditors and other trade advances which is not an unascertained liability and therefore, should not be added back while computing book profits under section 115JB of the Act. 59. The Honourable DRP and learned AO have erred in disregarding the decisions of the SC and various other courts relied by the Appellant in support of its arguments during the course of assessment proceedings. 60. Without prejudice to the above, the learned AO has erred in law and on facts in not providing the Assessee an opportunity of being heard before making an addition to the book profits under section 115JB of the Act for the subject AY, thereby violating the principles of equity and natural justice. IX. Other grounds 61. The learned AO has erred in law and on facts by not granting appropriate credit of the Tax Deduction at Source ("TDS"), as claimed by the Appellant in the return of income. 62. The learned AO has erred in law and on facts in levying interest under section 234A of the Act even though the Return of Income was filed within the due date, and has also erred in re- computing interest under section 234C of the Act. 63. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Very large business - Caters to corporate customers such as Infosys. TCS etc. Smart phone business Lenovo India currently has a workforce of about 700 people. About 350 are housed at headquarters i.e. Bangalore and balance are spread across locations in India. Budgets and forecasts Lenovo India does not prepare economic and market analyses in the form of forecasts which have bearing on the pricing of the international transactions entered into during the year under review." 2.1 During the impugned assessment year, the following international transactions were undertaken by the assessee:- 2.2 The following financial segmental analysis prepared by the TPO is as under:- 2.3 The ld.TPO from tax payers study report noticed that the assessee had adopted CUP method as the most appropriate method for import of parts of manufacture of personal computers for determination of PLI. The ld.TPO after considering the written submissions, computed the adjustment of ALP after applying TNMM as the most appropriate method and determined the adjustment for Manufacturing segment. The DRP also accepted the reasons given by the TPO for applying the TNMM as most appropriate method for compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. * Assessee had compared the average price of each product purchased from the AEs throughout the year with the average price of products purchased from unrelated parties. 3. Industry average billing rate cannot be considered in this method by relying on the decision of the Bangalore ITAT in the case of Aztec Software & Technology Services vs ACIT Facts in case of Aztec Software and Technology Services Vs ACIT are completely different from Assessee's case: * Case law pertains to a taxpayer in the software services industry which is materially different from Assessee's business, i.e., the hardware manufacturing segment * In case law, the rates were dependent on the expertise and technical level of the person performing the function and measurement of such qualitative service can be subjective. However, in the instant case, components have distinctive codes by which they are known in the industry and the measurement of the prices is not subjective. * Case law was based on the fact that the taxpayer had received income from services rendered to its AE and Assessee's transactions in the present case pertains to expenses that have been incurred. * Lastly, in the case law r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been duly dealt by the Hon'ble Tribunal and Hon'ble DRP in Appellant's own case for AY 2010-11. The Hon'ble DRP has independently considered the matter and concluded that CUP is the MAM. Following is the relevant extract from the DRP Direction: "4.6 The taxpayer's objections as above have been considered and are found to carry merit. When the product category imported is identifiable, the adoption of internal CUP would appear to be the most reasonable method of TP analysis. The TPO's contention that CUP has been applied only to 91% of the total purchase made from AE's is not borne out from facts and the TPO appears to have been confused with the transaction involving import by the taxpayer made adjustment for the remaining 21 products. The Hon'ble Tribunal Bangalore's view in Appellant's own case are also found to be squarely applicable for FY 2009-10. In view of these reasons, the replacement of CUP by TNMM by the TPO is found to be unjustified. The TPO is directed to adopt the CUP method as the basis for TP analysis this year. The objections raised are, therefore accepted." (emphasis supplied) Below is the extract from the Hon'ble DRP Directions: 4. The Honorable DRP f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee in this regard was that each of the component/parts were identified with a unique identification number and the details were captured in the TP Analysis. The second objection of the TPO was that the Assessee used weighted average of price of components/parts imported throughout the year and therefore it cannot be said that the method adopted by the Assessee was CUP as weighted average price is not the actual price in the controlled and uncontrolled transaction. The Assessee's reply in this regard was that the components/parts were imported throughout the year and were large in number. It was practically impossible to compare each and every import transaction. It was the plea of the Assessee that the price would depend on quantity imported and used in the manufacture of computers and hence weighted average would be the most appropriate price that should be chosen for comparison. In support of its contention that weighted average price is more appropriate the Assessee relied on decision of ITAT Mumbai Bench in the case of Gharda Chemicals Ltd. 2009 TIOL 790 (Mumbai ITAT) and Audco India Ltd. 47 SOT 420. The third reason given by the TPO was that industry average billing will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst take up Gr. No. II sub grounds 2 to 6 which grounds relate to the contention of the Assessee that CUP should have been accepted as the MAM. We have heard the rival submissions. As far as the issue of MAM in the case of the Assessee in the transaction of import of components is concerned, we have already extracted the reasons assigned by the TPO for rejecting CUP as MAM and the reasons given by the Assessee as to why the reasons assigned by the TPO are unsustainable. 10. In AY 2006-07, the Tribunal has in its order dated 30.5.2016 in IT (TP) A.No. 582/Bang/2015 upheld the DRP's direction that CUP is the MAM to be applied in the case of the Assessee. In AY 2007-08, the DRP upheld CUP as the MAM and the department did not file any appeal against that order of DRP before the Tribunal. In AY 2008-09 the TPO vide his order dated 31.10.2011 accept Assessee's adoption of CUP as MAM and also accepted that price paid in the international transaction to the AE is at Arm's Length. In AY 2009-10 in ITA(TP)A. No. 74/Bang/2014 order dated 6.7.2018 the Tribunal upheld order of the DRP accepting CUP as MAM. In AY 2010-11 the Tribunal in IT(TP)A No. 580/Bang/2015 order dated 31.3.2017 upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e primarily to promote the business of Appellant and the same is done to influence the volume of sales of the Appellant in India. The ld. TPO issued show cause notice and observed that the appellant has not confined itself to distribution of trading goods but has performed additional functions in the form of AMP. Therefore, the Company needs to be adequately compensated for such additional functions. (Refer Page 270 of Appeal Set) , RPM analysis carried out by the Appellant in the TP Doc is flawed as AMP is not captured while calculating gross margin. (Refer Page 271 of Appeal Set), Ratio of AMP to sales incurred by 9 comparable companies selected by the Appellant for benchmarking trading segment is much lower than the ratio of AMP to sales as incurred by Lenovo India thereby TPO is of the view that Appellant has incurred much higher AMP expenditure than the industry average. (Refer Page 272 of Appeal Set), The excessive AMP expense constitutes an international transaction. This additional function of building marketing intangible for the AE should have been reimbursed by AE to the Appellant with a markup. (Refer Page 272 of Appeal Set). The ld. DRP also upheld the observations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with Rule 10B(1), 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." (Emphasis supplied) The Delhi HC has also held, where the learned AO / TPO accepts comparables as a bundled transaction, AMP expenditure cannot be treated as a separate international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be presumed that AMP expenses incurred by the Assessee are at the instance or on behalf of the associated enterprise. It was held that in absence of any international transaction relating to AMP expenses, the impugned TP adjustment cannot be sustained. Further, the Hon'ble bench also held that The Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. 19. In the Appellant's own case for AY 2015-2016, AY 2014-2015, AY 2013-2014 & AY 2012-2013, the Hon'ble Tribunal has deleted the Transfer Pricing adjustment with regard to the above AMP expense. Below are the relevant extracts from the orders of the Hon'ble Tribunal: Ruling Findings Lenovo India Private Limited Bangalore Tribunal ITA No. 2444/Bang/2019 Order Date: 06.03.2020 AY: 2015-2016 Relevant Para: 17. We have considered his submission and are of the view that it would be just and appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e categorical observation by the Ld.TPO regarding the trading segment to be at arm's length, we direct the Ld.AO/TPO to delete the adjustment proposed, in respect of the AMP expenses as it cannot be treated as international transactions in the present facts of the case. [Page 25 of the ITAT order] [refer page 35 of Case Law Compilation] Lenovo India Private Limited Bangalore Tribunal ITA No. 452/Bang/2017 Order Date: 05.05.2022 AY: 2012-2013 Relevant Para: 4.3 However, the Ld A.R has contended before us that the AMP expenses, in the facts and circumstances of the case, cannot be considered as an international transaction. In support of this contention, he brought out certain facts and also placed reliance on the decision rendered by Hon'ble Delhi High court in the case of Maruti Suzuki Ltd (supra). We notice that the facts surrounding the AMP expenses have to be examined by AO/TPO vis-a-vis the decision rendered by Hon'ble Delhi High court in the above said case. Further, we notice that the co-ordinate bench has restored an identical issue to the file of AO/TPO in AY 2015-16, we prefer to restore this issue to the file of AO/TPO in this year also. We also direct AO/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee compared to the previous year which is 2.71% of the turnover. The assessee had not carried out any exercise to determine the ALP of such expenses although these were leading to rise of marketing intengibles in the form of brand value for AEs of the assessee. The TPO concluded that the benefit arising out of AMP expenses over and above average marketing expenses towards sales is a benefit arising to AEs and not to the assessee and so the AEs should reimburse the assessee with a mark-up for the marketing support given by the assessee for promoting the Brands. The AMP function is an international transactions which was confronted to the assessee by show-cause notice. It is undisputed fact the AE is the legal owner for brands marketed by the assessee and located outside India. The expenses incurred by the assessee enhances the value of the marketing intangibles of the AE, therefore the assessee needs to be compensated for such additional functions undertaken by it, since the assessee is only distributor. It is also evident from the agreement between the parties that the assessee has to undertake advertisement. The assessee has incurred huge expenses towards AMP which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid addition. The DRP upheld the order of the TPO. 14. The ld. counsel for the assessee submitted before us that incurring of AMP expenses does not constitute an international transaction and in this regard filed before us a copy of the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India P. Ltd. v. CIT, 374 ITR 118 (Del). Our attention was drawn to para 101 of the aforesaid decision in which the Hon'ble Delhi High Court held that once the TPO accepts and adopts TNM Method and then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation and segregation, it would lead to an unusual and incongruous results as AMP is the cost or expense and is not diverse. It is factored in the net profit of the interlinked 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et margin of the comparable companies was arrived at 2.62% and the assessee's net profit margin was 1.45% which was within the +/- range permitted under proviso to section 92CA(2) of the Act. 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 case of Sony Ericsson Mobile Communications India P. Ltd. (supra), incurring of AMP expenses cannot be treated as international transaction and consequently determination of ALP would not arise for consideration at all. We therefore set aside the order of the AO and remand the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method and if by such method the price received in the international transaction is considered as at arm's length, then no separate addition needs to be made. In view of the above conclusion, we are of the view that sub-grounds (23) to (34) in ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year; - Repair rate is the percentage of claims out of the total sales made on the historical data for the region; and - Cost per claim is the average expected repair cost per desktops/ laptops/ smartphones based on historical data for the region Therefore, the Appellant submits that the method followed for creation of warranty is scientific and the same has not been created on an ad- hoc basis. As per the provisions laid down in AS 29 a provision is a liability which can be measured only by using substantial degree of estimation. Further, provision can be recognized on fulfillment of the following conditions: * There is a present obligation as a result of past event; * It is probable that an outflow of resources embodying economic benefit will be required to settle the obligation; and * A reliable estimate can be made of the amount of obligation. In light of the aforementioned conditions, it can be said the Company had a present obligation to make good the claims under warranty, which is arising out of the past sales . Since the Company has no other realistic alternative in settling the warranty obligation arising due to sale, it is an obligating event fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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." (Refer page 3108- 3111 of PB Vol IV) * AY 2007-08 Placing the reliance on the Appellant's own case for the AY 2011-12 the Hon'ble ITAT has concluded: "Para 5- Thus the Tribunal has taken a consistent view on this issue. The Id. Senior Counsel has also relied upon the decision dt. 10.4.2013 of 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'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,600/- relating to provision for warranty" * AY 2013-14 Placing the reliance on Appellant's own case for AY 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12 the Hon'ble ITAT has concluded: "Based on the consistent view taken by coordinate bench of this Tribunal 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 (supra), we hold that provision for warranty expenditure is allowable". * AY 2014-15 Para 24- We notice that the Tribunal has been consistently taking the similar view in assessee's own case for Assessment Year 2006-07, 2007-08, 2010-11 to 2015-16 also. Therefore, we respectfully follow the decisions of the Co-ordinate Bench and hold that the provision for warranty is an allowable expenditure. * AY 2015-16 (supra) "Para 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res in FY. 2007-08 to Rs. 1286.92 crores in FY 2008-09. Thus, provision created has increased from 3.34% of turnover to 8.40% of turnover in FY. 2008-09. There is no reason as to why there is such a huge jump in provision created even though there is reduction in sales turnover. 5.14 Further, it is seen that the provision created has fallen from Rs. 108.79 crores in FY.2008-09 to Rs-97.20 crores in FY. 2009-10, inspite of increase in turnover from Rs. 1286.92 crores in FY.2008-09 to Rs. 1329.58 crores in FY. 2009-10. Here, provision created has fallen from 8.40% to 7.31% in FY. 2009-10. Even if it is presumed that the reason for increase in provision created was due to increase in service cost including labor, travelling expenses. etc., the same does not justify the fall in provision created in the very next year though there is increase in turnover. " 5.15 The Warranty provision utilized over the years has always been less than the provision created. Never ever the provision utilized has crossed the water mark of provision created. Consequently. the closing balance of the provision created has increased over the year Rs. which has reached as high as Rs. 407.24 crores in FY 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to note that the Company, after having considered the present obligation arising from the past event, the outflow of resource and the past experience has a scientific methodology which is followed consistently year on year for the creation for provision for warranty. The scientific methodology followed by the Company year on year for creation of provision for warranty is dependent on the sales, the repair rate, cost of servicing the warranty claims and the utilisation of warranty provision for each year. The details of provision for warranty created over years is enclosed in the paper book. The Appellant submits that it provides warranty ranging from 1 to 3 years on sale of desktops, laptops and smartphones made to customers in India. The utilization of a particular year cannot be compared with the provision of the same year but should be compared to provision of the preceding year against which such utilization is made. Accordingly, the learned AO has erred in comparing the utilization over provision of the same year to arrive at the conclusion that the provision for warranty is an unascertained liability. In this regard, a specific reference is made to the ruling of Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said the Company had a present obligation to make good the claims under warranty, which is arising out of the past sales . Since the Company has no other realistic alternative in settling the warranty obligation arising due to sale, it is an obligating event for the Company and thus, the Company satisfies the first condition stipulated in AS 29 for the recognition of provision. Further, in case of warranty claims made by the customers, the Company is obligated to make good the claim by virtue of warranty agreement and this essentially results in outflow of resources embodying economic benefit to the Company and thus, the same satisfies the second condition stipulated in AS 29 for the recognition of provision. On the third condition, it would be relevant to note that the Company, after having considered the present obligation arising from the past event, the outflow of resource and the past experience has a scientific methodology which is followed consistently year on year for the creation for provision for warranty. The scientific methodology followed by the Company year on year for creation of provision for warranty is dependent on the sales, the repair rate, cost of servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onths. If by application of the formula of multiplying machine months with repair action rate and cost per claim, an excessive warranty provisioning had resulted, then definitely in the succeeding year the expenditure incurred on warranty would be much less. The table above would show that expenditure on warranty was higher in almost all succeeding years except financial year 2009-09. In such circumstances we cannot say that assessee had followed a method which was not scientific. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw are answered against the revenue and in favour of the assessee." (Refer page 3183-3201 of PB Vol IV ). Further in this context, we submit that the Honourable ITAT in the Company's own case for AY 2006-07, AY 2007-08, AY 2010-11, AY 2011-12, AY 2012-13, AY 2013-14 and AY 2015-16 has upheld that provision for warranty has been created on a scientific basis and hence allowable as expenditure under section 37 under the Act. The relevant extract of the orders passed by Honourable ITAT in the Company's case for AY 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12, AY 2012-13, AY 2013-14, 2014-15 and AY 2015-16 has been mentioned below: * AY 2006-07 "Para 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Private Limited (supra), while upholding Lenovo India's claim for deduction of provision for warranty as an allowable expenditure * AY 2012-13 "Para 5.3- We also notice that an identical disallowance made by the AO in assessment year 2011-12 has since been allowed by Hon'ble High Court of Karnataka in the assessee's own case following the decision rendered by Hon'ble Supreme Court in the case of Bharat Earth Movers Vs. CIT 245 ITR 278 by holding that no substantial question of law has arisen on this issue. Accordingly, following the decision rendered by the coordinate bench as well as Hon'ble jurisdictional High Court, we direct the A.O. to delete the disallowance of Rs. 3,49,28,600/- relating to provision for warranty" * AY 2013-14 Placing the reliance on Appellant's own case for AY 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12 the Hon'ble ITAT has concluded: "Based on the consistent view taken by coordinate bench of this Tribunal 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 (supra), we hold that provision for warranty expenditure is allowable" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge amount of Rs. 407.24 crores has been claimed as expenses over the years without actually incurring the same and claim of the provision for warranty though increasing year after year has not been charged to tax. 11. Considering the rival submissions, we are of the view that this has been considered by the co-ordinate bench in the assessee's own case for assessment year 2015-16, the relevant part is reproduced 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 compared the provision made in AY 2015-16 with the actual liability incurred on account of performance of warranty claims of the same AY 2015-16. The proper approach should be to compare the current year provision with the actual of the succeeding year because the discharge of the warranty obligation will have only in the subsequent years and not in the year in which the products are sold. Our attention was drawn to the decision of the Hon'ble ITAT in AY 2006-07 in IT(TP) A.No.582/Bang/2015 dated 30.5.2016 wherein the Tribunal pointed out and explained how a similar approach of the revenue authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Ground 7 of the assessee stands allowed." 32. The learned DR relied on the order 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or unutilized warranty amount found. Considering the entire facts the AO is directed to follow the direction in above terms. Ground No.45 to 47 related to addition of provision for warranty loss to the book profit u/s 115JB 12. The AO observed as per clause (i) of explanation 1 to sec. 115JB that the profit from the profit and loss account shall be reduced by the amount withdrawn from any provision for said amount is credited to the profit and loss account. But as per the assessee neither any such provision is withdrawn from the profit and loss account and he further observed that even otherwise the utilization during the year is utilization from the provision credited during the earlier previous years to which the utilization pertains and hence the above provisions are not allowable. The assessee failed to increase book profit by the addition towards provisions for warranty of Rs. 185.94 crores on account of provision for warranty and Rs. 17.55 lakhs on account unrealized foreign exchange loss while computing the income u/s 115JB of the Act. The AR of the assessee has relied on his written submission which are as under:- The learned AO has erred in law and on facts in not ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e added back to the book profits under section 115JB of the Act on the basis that the same is unascertainable. We wish to submit that the "Hon'ble HC in the case of Lenovo India for the year AY 2007-08 and AY 2011-12 has held ruled against the revenue and in favor of the Appellant. Hon'ble HC in the case of Lenovo India for the year AY 2011-12 has held ruled against the revenue and in favour of the Appellant. The relevant extract of the orders passed by Hon'ble HC in the Company's case for the AY 2011-12, has been mentioned below: "Learned Senior counsel for the assessee submitted that the second substantial question of law has been answered against the revenue in decision of the Supreme Court in Bharath Earth Movers vs. Commissioner of Income Tax', 245 ITR 278, the aforesaid submission could not be disputed by learned counsel for the revenue. (Refer page 3200- 3201 of PB Vol IV) For the reason assigned in the aforesaid decision, the second substantial question of law is answered against the revenue." In this context, we also wish to submit that the Honourable ITAT in the Appellant's own case for AY 2006-07, AY 2007-08, AY 2010-11, AY 2011-12, AY 2012-13, AY 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue stands set aside". * AY 2013-14 "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. Under such circumstances we do not find any merit in the manner in which the book profits for purposes of section 115JB has been computed. Accordingly, we direct the Ld.AO to exclude the two items from the book profits for purpose of computing tax liability under section 115JB of the Act". * AY 2014-15 Para 25- Ground Nos. (43) to (45) on the issue of addition of provision for warranty to the book profits under section 115JB is incidental. In view of the decision on the allowability of provision for warranty, this ground which is incidental, does not warrant any separate adjudication and hence dismissed. * AY 2015-16 "Para 35- As far Gr.No.VII raised by the Assessee is concerned, the same relates to addition made to the book profits u/s. 115JB of the Act on account of provision for warranty liability treating the same to be a liability of a contingent nature and hence liable to be added to the profit as per profit an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d debtor, creditors and other parties. The break- up of of unrealized foreign exchange losses amounting to INR 17,55,62,222 is enclosed as Appendix- 2. The Appellant, being incorporated under the Companies Act, 1956, is required to prepare its books of accounts on an accrual system of accounting. Further, as per section 211(3A) of the Companies Act, 1956, it is mandatory for each company to follow and apply all the accounting standards issued by the ICAI. Accordingly, the Appellant has accounted for the foreign exchange loss in accordance with 'AS 11 - Effects of changes in foreign exchange rates' issued by the ICAI. As per section 145(1) of the Act, income chargeable under the head "Profits and gains of business or profession" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) to section 145 states that the Central Government may notify in the Official Gazette from time- to-time accounting standards to be followed by any class of assesses or in respect of any class of income. The Central Government has notified two Accounting Standards till date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iabilities, is allowable as a deduction in the computation of income of the assessee, if such loss was in respect of a trading asset or in respect of circulating capital. The issue is squarely covered in the Appellant's case by the ruling of the Hon'ble Supreme Court in the case of Woodward Governor P Ltd (179 Taxman 326). The question before the Court was whether the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last day of the financial year cannot be considered as notional and can be allowed as a deduction or not. The Hon'ble Supreme Court held as follows: "The accounts and the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. The fact that the department taxed the gains on fluctuation on the basis of accrual while disallowing the loss is important and indicates the double standards adopted by the Department; The increase in liability on account of the fluctuation in the rate of foreign exchange remaining on the last day of the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Ltd., reported in [2022] 145 taxmann.com 389 (Del). The relevant paras are as under:- 26. The Revenue's contention is unmerited. There is no dispute that the Forward Contracts were entered into by the Assessee to hedge against foreign exchange fluctuations resulting from inflows/outflows in respect of the underlying contracts for provisions of consultancy and project management. Concededly, the Assessee is not dealing in foreign exchange. Clearly, the said transactions were to hedge against the risk of foreign exchange fluctuations and thus, fall within the exceptions of proviso (a) to section 43(5) of the Act. The Forward Contracts were to guard against any loss on account of future exchange fluctuations in respect of inflows and outflows relating to contracts for execution of the works entered into by the Assessee. 27. It is material to note that there is no allegation that the Assessee has not been following the system of accounting consistently. In Woodward Governor India (P.) Ltd. (supra), the Supreme Court had referred to AS-11. In terms of AS-11, the exchange difference arising on foreign currency transactions are necessary to be recognized as income or expense i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the CBDT Instructions and circulars which are contrary to law are not binding. 31. This Court finds no fault with the order of the learned CIT(A) as well as the learned Tribunal in finding that the loss, on account of Forward Contracts, cannot be considered as speculative and the AO had erred in disallowing the same. The questions raised (Questions I and II) are thus, covered by the decision of the Supreme Court in Woodward Governor India (P.) Ltd. (supra). 32. No substantial question of law arises from the ITA 976/Del/2013. 16.1 In that above judgement it has been held that loss on account of Forward Contracts, cannot be considered as speculative loss. The assessee has reinstated its debtors and creditors from the underlying transactions on the value of the foreign exchange at the year end. Respectfully following the above judgment of the Hon'ble High Court of Delhi in the case of Simon India Ltd., cited supra, the loss is allowed u/s 37 of the I.T. Act. 1961, accordingly the ground Nos.48 to 56 are allowed. Unrealized Foreign Exchange Loss under section 115JB Ground No. 57 to 61 17. The AO noted that the unrealized Foreign exchange loss is as unascertained liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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