AI Drafter 
TaxTMI 
TaxTMI 
2017 (10) TMI 1440
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....it was observed that the international transactions with Associated Engineer's (A.E.'s) were at Rs. 55 crore (rounded off) and therefore the case was referred to Transfer Pricing Officer (TPO) U/s 92CA(3) of the Act. The TPO proposed upward adjustment to Arms Length Price (ALP) at Rs. 21,52,03,376/- on account of International Transactions. Thereafter a draft assessment was passed wherein the adjustments as indicated by TPO were made. Aggrieved by the draft assessment order, assessee raised objections before Dispute Resolution Panel (DRP), who passed order dt.26.09.2011 u/s 144C(5) of the Act whereby DRP directed that the operating margin of the assessee to be considered at (23.18%) as against 14.36% considered by TPO and as against the computation of (27.25%) worked out by the assessee). Aggrieved by the order of DRP, assessee is now in appeal before us and has raised the following grounds : "1. The Ld. Dispute Resolution Panel ("DRP")/ Assessing Officer ("AO"), erred in making a transfer pricing adjustment of Rs. 18.99 crores, to the income of the appellant by holding that the international transactions of the appellant do not satisfy the arm's length principle envis....
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....icing adjustment, if any, should be computed on a proportionate basis by following the principle laid down in the ruling made by the Honourable Delhi Tribunal in the case of II Jin Electronics (I) (P) Ltd vs. ACIT (36 SOT 227). 12. The Ld. DRP/AO erred in disallowing warranty costs amounting to Rs. 52.19 Lakhs." 3. Assessee thereafter has raised additional ground which reads as under : "Ground No.13 Incorrect computation of operating profit margins of the Appellant and comparable companies. On the facts and circumstances of the case and in law, the Hon'ble DRP, learned AO and learned TPO have erred while computing operating profit margins of the Appellant and comparable companies. Ground No.14 : Not granting appropriate economic adjustments while determining the arm's length price of the international transactions of the Appellant. On the facts and circumstances of the case and in law, the Hon'ble DRP, learned AO and learned TPO have erred by not granting appropriate economic adjustments while determining the arm's length price of the international transactions of the Appellant." 4. Before us, at the outset, Ld.A.R. submitted that ....
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....ssessee was incomplete and the required details were missing for the establishment of A.L.P. for international transactions. He therefore determined the ALP of international transactions by adopting the approach followed in the immediate preceding year which was also upheld by the DRP. He thereafter considering the operating margin of the assessee at 14.36% as worked out by him, determined the adjustment to the income at Rs. 21,52,03,376/-. Aggrieved by the order of TPO, assessee carried the matter before DRP, who after considering the submissions of the assessee directed the exclusion of Schlafhorst Engineering (India) Limited from the list of comparable companies for computing the arithmetic mean of profit margin for benchmarking of the international transactions and directed the operating margin of the assessee to be considered at (23.18%) by observing as under :- "11.4 Erroneous computation of the assessee's operating margin by the TPO It was submitted by the assessee that on a without prejudice basis, even if the approach adopted by the TPO, wherein he has considered the amounts written back as non-operating, were to be given any credence, the ass....
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....RP after considering the submissions of the assessee, remand report of the TPO and comments of the assessee on the remand report, upheld the order of AO by observing as under :- "11.............. However contention of the assessee is not accepted. TPO vide letter dated 29/07/2011 has send his comments on the stand taken by the assessee. Relevant portion of the same is reproduced as under- 3.2 'The main argument of the appellant on this issue is that the amounts/liabilities written back do actually pertain to the financial year under consideration as the same have accrued in that year i.e. FY 2006-07 and in any business situation, write back of a provision or a liability is normal and very much related to the business operations of the year in which these amounts/liabilities are written back. (emphasis supplied). 3.3 The above arguments of the appellant are not acceptable for following reasons: a) The assessee, during the FY 2006-07, had received waiver letters from its creditors, on the basis of which the amounts/liabilities were written back. These amounts/liabilities written back are in connection with expenses accrued for the raw mate....
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....d not submitted any factual data in case of com parables accepted by the TPO.' Further though the assessee has cited decision of the Hon'ble ITAT Delhi in the case of Sony India(P) Ltd. Vs. DCIT, it is not known whether the department has accepted the findings of the Tribunal or has filed the appeal before hi her authorities. In view of the above, objection raised by the assessee is rejected." Aggrieved by the order of DRP, assessee is now in appeal before us. 6. Before us, Ld.A.R. submitted that the TPO while coming to the conclusion that for computing the operating margin of the assessee held that the amounts / liabilities written back needs to be excluded for the reason that they do not pertain to the operations of the assessee. He submitted that the aforesaid conclusion of the TPO is not correct. He submitted that before DRP assessee had furnished additional evidences and made detailed presentation to prove that the amounts written back are part of the operations of the assessee and are therefore to be considered as operating margin. He submitted that during the Financial Year 2006-07 based on the waiver letters received from it's A.E.'s and the ....
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.... against the order of the Delhi Tribunal, Revenue carried the matter before the Hon'ble Delhi High Court but however the issue of the exclusion of write back of the liabilities was not raised by the Revenue before the Hon'ble Delhi High Court meaning thereby that the Revenue has accepted the order of Tribunal, wherein the Hon'ble Delhi Tribunal has held it to be part of operating income. He further submitted that in the case of ACIT Vs. Gillete Diversified Operations Pvt. Limited in ITA No.400/DEL/2013 dt.01.04.2016, similar issue of liabilities no longer written back was arose, wherein it was held that the provision should be considered as operating income. He submitted that the Hon'ble Tribunal has further held that if the liabilities originally created were on account of capital amounts and then their write back cannot be considered as normal instances of the business and has to be excluded as operating income. He submitted that against the aforesaid order of Tribunal, the matter was carried by Revenue before Hon'ble Delhi High Court and the issue of exclusion of write back for computation of operating income was also not agitated by the Revenue. He therefore submitted that the ....
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....nt written back is a mere book entry and is not connected with business operations of the assessee. On the issue of the amounts written back as being operating income, we find that identical issue arose before the Coordinate Bench of the Tribunal, Delhi in the case of Sony India (P) Limited (supra) and the Co-ordinate Bench of the Tribunal of Delhi decided the issue in favour of the assessee by observing as under : "106.1 The first of these items is, provision written back amounting to Rs. 57,02,000. For exclusion of above item and for balances written back interest received from customers and other miscellaneous revenue receipts, the learned CIT(A) gave the following consolidated reasons : "(A) I find that interest received is a financial income and as such cannot be considered as operational receipts. (B) The items which have been written back as mentioned in sub-paras (i) and (ii) of this para, are nothing but merely accounting entries and are not connected to the operations of the appellant. ............ On merit we see no good reason to exclude provisions written back as not forming part of computing operating profit of ....
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....ack were wrongly provided for. It is a settled and well accepted proposition that adjustment can be made only on account of differences. It is not possible to believe that other comparable entities taken into consideration are not making and writing back provision of liabilities no more required. There is no material nor there any finding to support action of the Revenue authorities. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. The expenses for which provisions were originally made were considered operating in nature and allowed in assessment. These provisions no longer required by the taxpayer during the year under review were reversed in the books of account as per mercantile system of accounting and shown as income. Therefore, on facts we do not see any justification for excluding provisions written back in the P & L a/c as not forming part of the operating profit of the taxpayer. Accordingly, claim of the taxpayer is accepted." 9. We further find that against the order of the Tribunal, the matter was carried by the Revenue before Hon'ble Delhi High Court but no gr....
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....are rendered academic and therefore require no adjudication. Thus, the ground of the assessee is allowed for statistical purposes. 10. Ground No.12 is with respect to the warranty expenses of Rs. 52.19 lakhs. 10.1 AO noticed that assessee had claimed warranty expenses of Rs. 52,19,740/-. He noticed that assessee had made provision for warranty expenses at 1.15% of the total sales turnover uniformly on all the products. He noticed that assessee had sold different kinds of finished products and some of them are parts of machines and some of them are machines themselves. AO was of the view that in view of the difference in the products sold, there was no justification for providing the same percentage of warranty on all the products. He also noticed that assessee had not maintained a proper accounting system for capturing the relationship between nature of sales, the warranty provisions made and the actual expenses incurred subsequently. He accordingly held that the expenses claimed by assessee as warranty cost was merely an unascertained liability and not an accrued liability and since the expenditure was a contingent liability, it did not qualify for deduction u/s 37(1) of the....
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....n earlier years. The AO was directed by the Co-ordinate Bench of Tribunal to decide the issue after examining the nature of business, nature of products manufactured, past history of warranty claims, methods adopted by the assessee for acquiring the provision and decide the issue keeping in mind the decision of Hon'ble Supreme Court in the case of Rotork Controls India (P) Limited Vs. CIT reported in (2009) 314 ITR 62 (SC). The relevant observations of Co-ordinate Bench are as under : "13. The second Ground in the appeal is with respect to an addition of Rs. 8,95,141/- made by the Assessing Officer which represented assessee's claim for deduction on account of product warranty liability. The claim of the assessee was that the Provision for warranty was claimed as a deduction in view of the decision of the Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. vs. CIT, (2009) 314 ITR 62 (SC). The DRP dealt with the issue in the following manner :- "6.5. Warranty Provision: The objections raised in this matter have been already noted. The Assessing Officer has disallowed the assessee's claim on account of provision for warranty mainly on ....
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....d and discounted on an accrual basis so as to become deductible u/s 37(1) of the Act. For the aforesaid purpose, the Assessing Officer was required to examine the nature of the business, the nature of sales and nature of the product manufactured; past history of warranty claims, method adopted by the assessee for quantifying the provision, etc. and to decide the issue thereafter keeping in mind the judgement of the Hon'ble Supreme Court in the case of Rotork Control India P. Ltd. (supra). 15. However, we find that in para 5 of the assessment order, the Assessing Officer has summarily sustained the disallowance of Rs. 8,95,141/- on account of provision of warranty existence without determination the issues, which the DRP required him to address. Therefore, we are unable to uphold the order of the Assessing Officer on this aspect also. As a consequence, we set-aside the assessment order on this aspect also and direct the Assessing Officer to pass a speaking order after taking into consideration each of the points enumerated by the DRP in its order dated 30.08.2010 on this aspect. Needless to mention, the assessee shall furnish relevant material as would be required by the As....