TaxTMI 
TaxTMI 
TaxTMI 
2016 (10) TMI 423
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....ng royalty transactions. During the assessment proceed - ings, the AO found that the assessee had entered into International Transactions(IT. s)relating to purchase of components, valuing Rs. 22. 93 crores, that it had used CPM as the most appropriate method, that for international transactions relating to sale of components, purchase of fixed assets and payment of royalty it had used TNMM, that the PLI was at 5. 97% (OP/sales), that the margin of the four comparables was found at 0. 15% . The AO made a reference to the TPO, who called for further details in that regard. In its response the assessee submitted that the technology supplied by the AE was of superior quality, that it resulted in saving employee cost and increase profit margin. After considering the submissions of the assessee and the Technical Know-how agreement, the TPO held that under the agreement the licensor was required to impart transfer and convey the technical know-how, that the assessee had not manufactured any component or machine, that it was involved only in assembling of the components, that contention of the assessee that on account of the technology it was able to command better prices was not acceptabl....
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....ively, that the international transaction of the assessee were consistent with the ALP standard. He further held that assembly of machines required very high level of precision and accuracy that it was a manufacturing process per se, that the TPO had not carried out some fact finding exercise in respect of the comparables. Finally, he held that the AO was not justified in holding that payment of royalty should be taken at Nil, that the addition made by the AO had to be deleted. 2. 2. Before us, the DR supported the order of the TPO and stated that the TPO had applied CUP Method. The AR stated that there was no basis for rejecting the method adopted by the assessee. He referred to the cross appeals decided by the Tribunal(ITA No. 42/Mum/2012 and 8595/Mum/2011 dt. 3. 7. 2013-AY 2007-08. ) 2. 3. We have heard the rival submissions and perused the material before us. We find that while passing the order for the last AY the TPO had held that TNMM was the most appropriate method for benchmarking, that he had made an adjustment of Rs. 1. 50 crores under the head royalty payment, that the Tribunal had decided the issue in favour of the assessee. We find that the TPO had not given any rea....
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....tion of purchase of components. The Commissioner of Income Tax(Appeals) has bench marked all the International transaction of the assessee by using TNMM as most appropriate method and operating profit to sale as PLI and considering only two comparables. The Commissioner of Income Tax(Appeals) has determined the arithmetic mean at 8. 33% as against the assessee's operating profit/sale at 4. 71%. Accordingly, the Commissioner of Income Tax(Appeals) has enhanced an adjustment to Rs. 2, 56, 62, 326/- as against the adjustment made by the TPO at Rs. 1, 50, 68, 228/-. Consequently, a differential amount of Rs. 1, 05, 94, 098/- was directed to be enhanced. 8. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. Though the assessee has carried out various international transaction regarding payment of royalty, purchase of component and sale of component, however, the TPO made adjustment only with respect to royalty payment by treating the ALP of royalty at nil. The Commissioner of Income Tax(Appeals), though confirm the adjustment made by the TPO in respect of royalty payment but also enhanced the assessment by making adjustment in respect of purcha....
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....sessee is within the range of 5% of ALP being the arithmetic mean then no adjustment is permitted. Respectfully, following the above order of the Tribunal for the AY 2007-08 (supra), we decide the effective Ground of appeal against the AO. 3. Next effective ground of appeal is about deleting the addition of Rs. 22. 38 lakhs under the head provision for warranty (GOA-7-9). It was brought to our notice that the Tribunal, while deciding the appeal for the earlier year, had dealt with the issue. We are reproducing the relevant portion of the said order and same reads as under :- "20. We have considered the rival submission as well as relevant material on record. The Assessing Officer has disallowed the claim of the assessee on the ground that the estimation of provision for warranty is not based on any previous data. On appeal, though the assessee has furnished concerned details and claim that the provision for warranty is based on the actual expense incurred in the earlier years, however the Commissioner of Income Tax(Appeals) has not discussed the fact and aspect whether the provision is based on reliable estimates or not. The decision of Hon'ble Supreme Court in case of Rotork ....
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....) as the facts are totally distinguishable. Even otherwise the assessee has to pass through the triple test as declared therein in order to succeed in his claim on provision for warranty. In the absence of any such finding in its favour satisfying the said triple test, the assessee can not rely on the said decision of the apex court. We do not find any merits in the appeal and, therefore, both the questions of law are answered against the assessee. Accordingly, the tax case appeal is dismissed. No costs. " 21. Accordingly, we set aside this issue to the record of the Assessing Officer to decide this issue after examination of relevant facts as well as in light of the decision on this point. Since, the finding on the issue of warranty provision under normal computation of income will have bearing on the computation of book profit u/s 115JB, therefore, we remit this issue of adjustment u/s 115JB to the record of AO for decision the same as per law. Respectfully following the same, we restore back the matter to the file of the AO for fresh adjudication and decide the second effective ground in favour of the AO, in part. ITA No. 4898/Mum/2013 4. Effective Ground of appeal is abou....