2022 (5) TMI 1534 - AT - Income Tax

Tribunal sets aside transfer pricing adjustments, directs CUP method, and remands for re-examination.

M/s. Lenovo (India) Pvt. Ltd. Versus Deputy Commissioner of Income-tax, Circle 4 (1) (1), Bangalore

The Tribunal allowed the appeal, setting aside the A.O.'s orders on transfer pricing adjustments and disallowances, remanding them for re-examination with ... TP adjustment made in respect of manufacturing segment - manufacturing segment consisted of manufacturing and distribution of desktops and note books - assessee had benchmarked the international transactions in manufacturing segment under internal CUP method - TPO adopted TNM method and accordingly made transfer pricing adjustment - HELD THAT:- As in in assessment year 2015-16 [2020 (3) TMI 471 - ITAT BANGALORE] we set aside the order passed by the A.O. on this issue and restore the same to the file of TPO/AO with the direction to apply CUP method as most appropriate method and examine ALP accordingly, after providing adequate opportunity of being heard to the assessee. TP adjustment made in relation to “Advertising, marketing and promotion expenditure (AMP expenses) - HELD THAT:- We direct AO/TPO to first examine the applicability of decision rendered by Hon’ble Delhi High court in the case of Maruti Suzuki India Ltd. [2015 (12) TMI 634 - DELHI HIGH COURT] to the facts of the present case and accordingly first determine the question as to whether the AMP expenses would fall under the category of international transaction. If it is held to be not an international transaction, then the question of making any transfer pricing adjustment will not arise. After hearing the assessee and examining the facts afresh, the AO/TPO may take appropriate decision in accordance with law. Disallowance of provision for warranty - HELD THAT:- Identical disallowance made by the AO in assessment year 2011-12 has since been allowed by Hon’ble High Court of Karnataka [2021 (2) TMI 1337 - KARNATAKA HIGH COURT] in the assessee’s own case following the decision rendered in the case of Bharat Earth Movers [2000 (8) TMI 4 - SUPREME COURT] 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 relating to provision for warranty. Addition of “provision for warranty” to the net profits under Explanation 1 to sec. 115JB for the purpose of computing book profits, holding the same as ‘contingent liability’ - HELD THAT:- We hold that there is no requirement of making addition of provision for warranty to the net profit for computing book profit u/s 115JB of the Act. Accordingly, the AO is directed to delete the same. The order passed by Ld CIT(A) on this issue stands set aside. Addition of “provision for compensated absence” (Provision for leave encashment) treating it as contingent liability while computing book profit u/s 115JB - HELD THAT:- We notice that an identical issue has been considered in the assessee’s own case in assessment year 2011-12 and the Tribunal held that the provision for leave encashment need not be added back to book profits for the purpose of computing tax liability u/s 115JB of the Act. Thus we hold that the provision for compensated leave (provision for leave encashment) need not be added to the net profit for the purpose of computing book profit u/s 115JB of the Act as the same is not contingent liability. Issues Involved:1. Transfer pricing adjustment for the manufacturing segment.2. Transfer pricing adjustment related to Advertising, Marketing, and Promotion (AMP) expenses.3. Disallowance of provision for warranty.4. Addition of provision for warranty to net profits under Explanation 1 to Section 115JB for computing book profits.5. Addition of provision for compensated absence (leave encashment) to net profits under Explanation 1 to Section 115JB for computing book profits.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment for the Manufacturing Segment:The assessee contested the transfer pricing adjustment made by the A.O. for the manufacturing segment. The manufacturing segment included desktops and notebooks, and the assessee had benchmarked the international transactions using the internal Comparable Uncontrolled Price (CUP) method. However, the Transfer Pricing Officer (TPO) adopted the Transactional Net Margin (TNM) method, leading to an adjustment of Rs.22.62 crores, later reduced to Rs.9.79 crores by the Dispute Resolution Panel (DRP). The Tribunal referred to a previous decision in the assessee's own case for AY 2015-16, where the CUP method was deemed the Most Appropriate Method (MAM). Consequently, the Tribunal set aside the A.O.'s order and directed the TPO/AO to apply the CUP method and determine the Arm's Length Price (ALP) accordingly.2. Transfer Pricing Adjustment Related to Advertising, Marketing, and Promotion (AMP) Expenses:The assessee incurred Rs.1138 crores on AMP expenses, claiming it was not an international transaction as it was incurred in India for the distribution segment. The TPO applied the bright line test, resulting in a transfer pricing adjustment of Rs.111.68 crores, upheld by the DRP. The Tribunal noted that in a similar case for AY 2015-16, the issue was remanded to the A.O. to apply the net margin method to determine if the price received in the international transaction was at arm's length. The Tribunal directed the AO/TPO to first examine the applicability of the Delhi High Court's decision in Maruti Suzuki Ltd., which held that AMP expenses incurred without any arrangement with the overseas AE do not fall under international transactions. The AO/TPO was instructed to re-examine the facts and make a decision accordingly.3. Disallowance of Provision for Warranty:The assessee had provided Rs.103.75 crores for warranty and claimed it as a deduction. The A.O. disallowed it, treating it as a contingent liability, but allowed actual expenditure of Rs.100.25 crores, resulting in a net disallowance of Rs.3.49 crores. The Tribunal referred to its decision in the assessee's own case for AY 2015-16, where the provision for warranty was allowed based on a scientific method. The Tribunal also noted the Karnataka High Court's decision in the assessee's favor for AY 2011-12, following the Supreme Court's ruling in Bharat Earth Movers. Consequently, the Tribunal directed the A.O. to delete the disallowance.4. Addition of Provision for Warranty to Net Profits Under Explanation 1 to Section 115JB:The A.O. added the provision for warranty to the net profits for computing book profits under Section 115JB, treating it as a contingent liability. The Tribunal, referring to its decision in AY 2015-16, held that the provision for warranty is not a contingent liability and should not be added to the net profits for computing book profits. The Tribunal directed the A.O. to delete the addition.5. Addition of Provision for Compensated Absence (Leave Encashment) to Net Profits Under Explanation 1 to Section 115JB:The A.O. added the provision for leave encashment to the net profits for computing book profits under Section 115JB. The Tribunal referred to its decision in AY 2011-12, where it was held that the provision for leave encashment is not a contingent liability and should not be added to the book profits. The Tribunal directed the A.O. to delete the addition.Conclusion:The Tribunal allowed the appeal for statistical purposes, setting aside the A.O.'s orders on the issues of transfer pricing adjustments and disallowances, and remanding them for re-examination with specific directions. The Tribunal's decisions were consistent with previous rulings in the assessee's own cases and relevant judicial precedents.