Warranty provisioning, royalty characterization and transfer pricing adjustments were restricted to the actual international transactions, with depreciation remitted.

A contractual warranty provision supported by warranty obligations, past experience and consistent accounting treatment was treated as an ascertained liability, so the disallowance was deleted. Payments for technical drawings and designs acquired on a principal-to-principal basis as copyrighted articles were held not to be royalty, so disallowance under section 40(a)(i) was removed. In transfer pricing, adjustment had to be confined to the international transactions, not entity-wide results; a large-scale comparable was rejected and the tolerance range under the proviso to section 92C(2) was applied, so the adjustment was deleted. Depreciation on an asset purchased from an associated enterprise was restored for fresh consideration after completion of earlier-year proceedings.

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Issues: (i) whether provision for warranty was deductible as an ascertained liability and not a contingent liability; (ii) whether payment for technical drawings and designs was royalty requiring deduction of tax at source and disallowance under section 40(a)(i); (iii) whether the transfer pricing adjustment on purchase of raw materials and sale of generators to associated enterprises was sustainable, including the choice of comparables, use of single-year data, working capital adjustment, and application of the proviso to section 92C(2); and (iv) whether depreciation on the capital asset purchased from an associated enterprise in an earlier year could be disallowed in the current years.

Issue (i): Whether provision for warranty was deductible as an ascertained liability and not a contingent liability.

Analysis: The provision was made project-wise on the basis of contractual warranty obligations, past experience, and accounting consistency. The earlier order in the assessee's own case had already treated the liability as ascertained, and the factual matrix for the years under appeal was identical. The provision was also found to be reasonable on verification of reversals made in subsequent years.

Conclusion: The disallowance of warranty provision was deleted in favour of the assessee.

Issue (ii): Whether payment for technical drawings and designs was royalty requiring deduction of tax at source and disallowance under section 40(a)(i).

Analysis: The drawings and designs were acquired on a principal-to-principal basis as copyrighted articles, not as a transfer of copyright or a right to use copyright. The materials were imported, supported by invoices and customs documents, and were used for fulfilling specific customer contracts. On the same issue in the assessee's own case, the earlier order had held that such payments were business expenditure and not royalty.

Conclusion: The disallowance under section 40(a)(i) was deleted and the payments were held not to be royalty.

Issue (iii): Whether the transfer pricing adjustment on purchase of raw materials and sale of generators to associated enterprises was sustainable, including the choice of comparables, use of single-year data, working capital adjustment, and application of the proviso to section 92C(2).

Analysis: The Tribunal accepted that the assessee's transactions had to be benchmarked with regard to the value of the international transactions and not the entire entity level results. It held that Bharat Heavy Electricals Limited was not a proper comparable because of its substantially larger scale of operations. It also accepted that the assessee's international transactions fell within the tolerance range envisaged by the proviso to section 92C(2), and that the adjustment had to be confined to the proportion attributable to related-party transactions. The Tribunal therefore rejected the full entity-wide adjustment made by the transfer pricing authorities.

Conclusion: The transfer pricing adjustment on raw material purchases and sales to associated enterprises was deleted.

Issue (iv): Whether depreciation on the capital asset purchased from an associated enterprise in an earlier year could be disallowed in the current years.

Analysis: The disallowance was consequential to the transfer pricing determination made in the earlier year, and the foundational issue for that earlier year was still pending before the first appellate authority. In these circumstances, the matter could not be finally decided for the current years without the outcome of the earlier-year proceedings.

Conclusion: The issue was restored to the Assessing Officer for fresh decision after the earlier-year proceedings are concluded.

Final Conclusion: The appeals succeeded on the core warranty, royalty, and transfer pricing disputes, while the depreciation issue was sent back for reconsideration, resulting in partial relief to the assessee.

Ratio Decidendi: A contractual warranty liability based on reasonable estimation is deductible as an ascertained liability; acquisition of technical drawings and designs on a principal-to-principal basis amounts to purchase of a copyrighted article and not royalty; and transfer pricing adjustment must be confined to the international transaction and tested against proper comparables within the statutory tolerance band.

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