TaxTMI 
TaxTMI 
TaxTMI 
2017 (4) TMI 1146
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....issioner of Income Tax, Central Circle 41 Mumbai (hereinafter referred to as 'learned AO' or 'AO') under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - I, Mumbai (hereinafter referred to as the 'DRP') on the following grounds, each of which are without prejudice to one another: A. Transfer pricing adjustments 1. Non consideration of comparability analysis as documented in the transfer pricing study report On the facts and in the circumstances of the case and in law, the learned DRP! AO/ Deputy Commissioner of Income-tax - Transfer Pricing - 1(6) ('TPO') erred in not considering/ accepting the comparability analysis as documented by the Appellant in the Transfer Pricing study report (prepared as per provisions of the Act! Income-tax Rules, 1962) for benchmarking the international transaction of payment of royalty to AE. 2. Determining arms length price of royalty as Nil On the facts and in the circumstances of the case and in law, the learned DRP! AO! TPO erred in considering the Appellant as th....
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.... the Appellant in relation to payment of royalty and service fees/ handling charges by the Appellant to its AEs. B. Corporate tax adjustments I. Adjustments to book profit while computing income under section II5JB of the Act 10. Disallowing provisions for doubtful debts On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition in respect of provision for doubtful debts of Rs. 201 000,000 while computing book profit under section 11 5JB of the Act, as per the directions of the DRP. 11. Disallowing provisions for slow moving inventory On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition in respect of provision for slow moving inventories of Rs. 445,000,000 while computing book profit under section 11 5JB of the Act, as per the directions of the DRP. 12. Disallowing provisions loans and advances On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition in respect of provision for loans and advances of Rs. 40,000,000 while computing book profit under section 11 5JB of the Act, as per the directions of the DRP. 13. Disallow....
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....ed AO has erred in disallowing the provision of warranty amounting to Rs. 106,400,000, as per the directions of the DRP. 20. Initiation of penalty proceedings under section 27(1)(c) of the Act On the facts and in the circumstances of the case and in law, the learned AO has erred in initiating he penalty under section 271(1)(c) of the Act for various disallowances / additions." 3. In these grounds, the issue involved is with regard to transfer pricing adjustment made by the TPO on the amount of royalty paid to by the assessee to its (AE), viz. Matsushita Electric Works Ltd (MEW). 4. It has been informed that this issue was referred by the AE of the assessee for mutual agreement procedure between India - Japan with Japanese Competent Authorities. The order has been passed under MAP on 07-07-2014 wherein the payment of royalty has been agreed to be allowable @1.15%. Our attention was also drawn upon the Order Giving Effect to Mutual Agreement Procedure dated 13-03-2015 passed by the AO. 5. Under the aforesaid circumstances, these grounds were not pressed by Ld. Counsel of the assessee as these have become infructuous as on date. 6. Per contra, Ld. CIT-DR did not raise any object....
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....r these circumstances, the AO disallowed the amount of provision for warranty for Rs. 10,64,00,000. The DRP endorsed the observations of the AO and confirmed the disallowance. 11. During the course of hearing before us, Ld. Counsel made arguments in detail to contest the actions of the lower authorities. It was submitted that provision for warranty was made on the basis of statistics of immediately preceding year. Our attention was drawn on the chart submitted by the assessee showing that in subsequent years up to AY 2014-15, the actual amount of warranty expenses was far more than the amount provided for in the year which indicates that the amount estimated by the assessee was not only scientific but also highly conservative, thus, the claim made was very reasonable and it should be allowed. 12 With regard to the other reasons given by the AO, i.e. change of method of accounting from actual to provision basis, it was submitted by the Ld .Counsel that admittedly, the assessee has changed the method of accounting in this year. Therefore, a claim has been made on actual basis also and the provision has also been made on account of the sales achieved during the impugned year. Howeve....
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....e orders of the lower authorities. It was submitted by him that no scientific basis has been adopted by the assessee to make estimation of the amount of provision. It was submitted that the information provided by way of chart was not only unauthentic but also incorrect on the face of it which shall be evident from the fact that the computation of the provision has been made by extrapolating the figures of 5.5 months i.e. April, 2007 to 15th September, 2007 whereas the factual amount of complete 12 months of the financial year 2007-08 was very much available. But the amount of provision has been notionally and wrongly worked out. It was submitted by him that if the ratio of actual expenses incurred during the financial year 2007- 08 is worked out on the turnover of financial year 2006-07, as has been made the basis by the assessee to estimate the provisions of financial 2007-08, then the ration comes to around 0.60% whereas assessee has wrongly computed the same at 1.18%. It was submitted by him that assessee has been absolutely negligent and misleading in its approach. However with regard to the allegation of the AO about making double claims by the assessee, nothing was shown to ....
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....f the computation s made accordingly, then the amount of provision is highly conservative in comparison to the expenditure incurred on actual basis in all the subsequent years i.e. upto the financial year 2013-14. 18. We have considered all the arguments. It is noted by us that in this year assessee changed its method of accounting, as a result of which the amount of provision on account of warranty has been made. It is further noted by us that in all subsequent years assessee has consistently followed the new method of accounting whereby claim has been made by way of 'provision for warranty' and not on actual basis. Thus, assessee's approach cannot be said to be nonbonafide nor can it be said that assessee had any ulterior motive to evade tax or to distort the profits of the year. The claim has been made on actual basis as well as on account of provision because in the year of transition, there was no other option before the assessee but to make the claim as per both the methods. Further, we find force in the reasoning given by the Ld. Counsel of the assessee that no double deduction would be made in this manner because claim made by the assessee on actual basis is on account of ....
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....ing stock which will, in its turn, become the value of the opening stock of the next year. If instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change; and correspondingly the value of the opening stock of that year and so on. Whenever there is a change in the method of valuation, there is bound to be some distortion in the calculation of profit in the year in which the change takes place. But if the change is brought about bona fide and is in accordance with the normally accepted accounting practice, there is no reason why such a change should not be permitted. The direction given by the Tribunal to revise and determine the value of the opening stock also by excluding all overhead expenses, is not justified." (Emphasis supplied in bold and underline) 19. Thus, from the perusal of the above, it may be noted that Hon'ble High Court has taken note of this crucial aspect that in the year of change, there is bound to be some distortion in the calculation of profit of the year in which the change takes place. However, if the c....
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.... Sales for financial year ending 31 March 2007 8,25,30,47,487 Ratio based on last years sale 0.61% 22. The said figure has been accepted as correct by Ld. CIT-DR also. Thus, we find it proper that amount of provision should be allowed for the said figure of Rs. 549,85,586. The AO is accordingly directed to delete the disallowance to this extent and the balance of disallowance, if any, is upheld. The assessee gets part relief. 23. With regard to the adjustment in book profit u/s115JB is concerned, it is noted that this issue is squarely covered in favour of the assessee by the judgment of Hon'ble Delhi High Court in the case of CIT v. Becton Dickason India (P) Ltd. (supra), wherein it has been held that the provision for warranty cannot be treated as provision for diminution in value of any assets so as to be covered by Explanation 1(i) to section 115JB (2) and thus no additions to book profit can be made. Further, Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) held that amount of provision made on account of warranty expenses cannot be said to be unascertained liability. Thus, taking into account both these decisions, we find that no addit....
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....s own case for AY 2009-10 in ITA NO. 786/M/2014 dated 23/9/2016. 30. Per contra Ld. CIT-DR relied upon the orders of lower authorities and submitted that in absence of proper details disallowance was rightly made by the AO and upheld by the DRP. 31. We have gone through the orders passed by the lower authorities as well as order passed by the Tribunal in assessee's own case for AY 2009-10. It is noted that the Tribunal has noted in its order that scrap has been generated in the course of manufacturing and production process and therefore it is eligible for the benefit of deduction 80IC. Relevant part of the order of Tribunal is reproduced below:- "9. In Grounds of appeal No.14 & 15, the issue relates to exclusion of income by way of scrap sales for the purposes of deduction u/s. 80IC of the Act. On this aspect, the Assessing Officer has excluded a sum of Rs. 12,40,48,000/-, which ostensibly is the figure of sale of scrap of the assessee as a whole and not in relation to the section 80IC eligible Haridwar Unit. Therefore, the adoption of the figure of Rs. 12,40,48,000/- by the Assessing Officer is anyway incorrect. The scrap sales in relation to the Haridwar Unit is only at Rs. 1....